Reproduced with permission from World ClimateChange Report, Vol. 2008, No. 170, 09/03/2008.Copyright � 2008 by The Bureau of National Affairs,Inc. (800-372-1033) http://www.bna.com

C A R B O N S E Q U E S T R AT I O N

The authors of this article say the technical complexity, economic impacts, social de-

mand, and political challenges underpinning the deployment of carbon capture and storage

technology to reduce greenhouse gas emissions from coal-fired electric power generation

are daunting, but not unprecedented. In response to these challenges, the authors recom-

mend the creation of a new ‘federal government corporation’ in combination with a suite of

financial risk management mechanisms to ensure the deployment of carbon capture and

storage technology in an efficient, safe, and environmentally balanced manner.

Storing Carbon: Options for Liability Risk Management, Financial Responsibility

BY CHIARA TRABUCCHI AND LINDENE PATTON

I. Executive Summary

C oal use and climate protection are on a collisioncourse1 and without rapid deployment of carboncapture and storage (CCS) systems, 2050 goals of

emissions reductions likely will not be met. This articlediscusses options and offers recommendations for a fi-nancial2 risk management mechanism designed to

hedge risks arising from the operational, closure/postclosure, and long–term stewardship phases of CCS sys-tems, and specifically geologic sequestration.

CCS involves a series of processes designed to keeplarge quantities of carbon dioxide emissions from coalfired power plants and other industrial operations outof the atmosphere, thereby reducing the risks of climatechange. However, CCS processes also create a suite ofrisks, including possible injury to private and public

1 See Statement of congressional testimony of Michael Goo,climate legislative director for the Natural Resources DefenseCouncil, to the House Committee on Energy and CommerceSubcommittee on Energy and Air Quality, July 10, 2008 (133DEN A-6, 7/11/08).

2 The scope of this article is limited to financial mecha-nisms. Although this paper does not specifically address physi-cal risk management issues, it is important to note that physi-cal risk management issues are an integral part of the design

and underwriting criteria for financial management mecha-nisms. Specifically, an effective financial risk managementsystem must ensure that developers, owners, and operators ofCCS projects are incentivized to design and implement highquality physical risk management systems. By design, it is es-sential to assure that the financial risk management systemmanages solely prospective and fortuitous risks and does notencourage or effectuate the transfer of risks to a financial in-strument, due to perverse financial incentives, that could bemanaged more effectively and efficiently by physical means.

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goods, which will continue beyond the operational lifeof the sequestration facility. It is likely that CCSprojects will be sited near population centers, valuablesubsurface resources, increasingly scarce sources ofpotable surface/groundwater, or protected or sensitivehabitats. Proximity to one or more of these areas willcreate the potential for financial consequences, eitherin terms of corrective action or compensatory damages.Further, the CCS facility may face financial exposureunder a carbon regime if CCS credits are used to meetcarbon constraint standards and the sequestration sitefails and the carbon dioxide leaks.

For these reasons, CCS-related risks present a uniqueset of consequences whereby neither traditional public,nor traditional private, nor a blend of traditional publicand private risk management structures offer the per-fect model for mitigating and managing such risks.With few exceptions, previously designed financial riskmanagement mechanisms suffer from problems of fit,interplay and/or scalability—poor alignment (or fit) be-tween the properties of the physical system, the finan-

cial characteristics of the associated risks, and the at-tributes of the institution regulating or managing therisk; lack of integration (or interplay) between andamong existing laws, new laws and partnering institu-tions and the risks created by these new laws; and aninability to scale the financial mechanisms up or downin response to geopolitical, geographic, social, or envi-ronmental change.3

No financial risk management framework should in-appropriately subsidize or otherwise provide economicadvantage for CCS over future, as yet undeveloped orimproved, technologies designed to make coal a cleanersource of power.

The technical complexity, economic impacts, socialdemand, and political challenges underpinning the de-

3 Oran Young, Environmental Governance: The Role of In-stitutions in Causing and Confronting Environmental Prob-lems, International Environmental Agreements: Politics, Lawand Economics 3:377-393 (2003) Kluwer Academic Publishers(Netherlands).

Table 1. Recommended Financial Risk Management Framework for CCS

PART 1. CCS SAFETY BOARDDesign Goal. Ensure siting/operating decisions that consider risk and minimize the potential for residual injury at the timeof CCS site transfer.Attributes� Private/Public board, chartered as a federal government

corporation.� Comprises no less than nine members, including

technical experts, government legal experts, privatelegal experts, financial experts, and state/federalregulators.

� Term limits of no less than six years.

Charge� Approve siting (‘‘go’’ v. ‘‘no-go’’ decisions) for CCS

projects.� Oversee design and management of CCS projects.� Serve as arbiter for existing federal agencies authorized

to address issues of technical safety, economic, climate,and ecological preservation related to CCS projects.

� Certify completion of key project milestones, e.g., siteclosure, post-closure.

� Accept eventual title to CCS sites, including attendantfinancial responsibility for long-term care.

� Maintain financial and administrative managementauthority over the CCS National Trust, includingdistribution of funds and the ability to use a percentageof collected funds to purchase risk transfer instruments,e.g., insurance/bonds.

PART 2. CCS NATIONAL TRUSTDesign Goal. Ensure availability of funds to pay for future (un)expected costs of long-term care and delimitedcompensatory damages.Attributes� Financed through a combination of: (a) initial authorizing

funds, (b) a flat per unit fee on carbon dioxidesequestered during the operating life of the CCS facility,and/or (c) a transaction fee for carbon trades.

� Fee collection suspended when the trust reaches amaximum dollar threshold.

� Fee collection resumes when accumulation falls below aprescribed minimum threshold.

� Balance of funds mandated between a maximum (ceiling)and minimum (floor) financial threshold.

Charge� Address prospective risk, not known existing loss.� Provide funds to pay for long-term care expenses

associated with corrective action and compensatorydamages resulting after the CCS facility is released fromits post-closure obligations.

� Ensure trust balance and fund contributions map to theexpected value of expenses/financial consequenceslikely to be incurred over the long term.

� Trust balance should be re-evaluated when actual site-specific monitoring data become available, but on noless frequently than every three years.

In addition to authorizing legislation for the CCSSB and the CCS National Trust, ADDITIONAL ENABLING LEGISLATIONshould:� Establish Liability Provisions� Identify Damages Thresholds� Require Evidence of Financial Responsibility

� Provide for CCSSB Oversight Authority� Allow for State Access to Funds in the CCS National

Trust� Address Miscellaneous Receipts Act Issues

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ployment of CCS technology to reduce greenhouse gasemissions from coal-fired electric power generation aredaunting, but not unprecedented. It is in response tothese challenges that the authors recommend the cre-ation of a new ‘federal government corporation’ in com-bination with a suite of financial risk managementmechanisms designed to ensure the deployment of CCSin an economically efficient, safe, and environmentally-balanced manner.4 Table 1 sets forth a high level sum-mary of the recommended financial risk managementframework. The components of the proposed structureare well grounded in financial theory, science, econom-ics and current technological conditions; and appropri-ately weigh the complex interplay of existing laws andmyriad federal authorities with a role to play in the ad-vancement of CCS technology.

While existing institutions may argue that their au-thorities currently extend to certain (or all) aspects ofthe CCS project lifecycle, approaching prospective fi-nancial risk management of a new technology usingtools designed for unrelated applications is highly likelyto result in a bad fit5 and unfortunate financial conse-quences. Lessons learned from Price-Andersen, the Na-tional Flood Insurance Program, the California wildfiremanagement experience, and others suggest that spe-cifically designed solutions that appropriately weigh is-sues of fit, interplay, and scalability are most likely toachieve public policy and financial goals.

In sum, the focus of this article is the development ofa prospective risk management system, rather than areactive risk assumption or allocation mechanism. Thedesign of the proposed financial risk managementframework for CCS considers lessons learned from pastfinancial liability/indemnity models, many of whichwere established in reaction to immediate loss or dam-age. At this time, there is no ‘loss’ or ‘damage’ arisingfrom CCS. The authors have the luxury of 20-20 hind-sight with respect to past models, and therefore an un-paralleled opportunity to design a framework that re-sponsibly reduces risks from CCS operations and miti-gates the attendant financial consequences on athoughtful, proactive basis for future generations.

Basic Design for CCS Financial Risk ManagementFinancial risk management is predicated on the abil-

ity to forecast accurately the range of event-driven out-comes, recognize that forecasts can be, and sometimes

are, wrong and weigh the consequences of beingwrong. The most effectively designed financial riskmanagement mechanism must respond to the changingnature of the subject facility’s operations and in a man-ner consistent with the physical reality and evolution ofrisks over time. In the context of CCS, different risksare likely to present themselves at different stages dur-ing the facility’s life-cycle, resulting in a range of conse-quences the financial materiality of which will dependon the site-specific characteristics and location of eachCCS project. For these reasons, different phases of theCCS process will warrant different financial (risk) man-agement mechanisms.

Further, financial mechanisms must be implementedby the institution with the best fit to effectuate thegoal—the institution best situated to implement and en-force terms and conditions designed to incentivizesound operating behavior and assure funds are ad-equate and readily accessible to pay for the activitiesnecessary to mitigate associated risks. The mechanismalso must be designed in recognition of, and with anability to, effectively interplay with the applicable legalschemes affecting the subject assets, natural resourcesand businesses within the regulated community. Essen-tially, jurisdiction, the nature of the harm, and the at-tendant financial consequences will interact to deter-mine liability, compensability, and which (if any) partycan transfer, release, or assume financial responsibility.

It is accepted generally that early movers will selec-tively site and operate CCS facilities in well-characterized, favorable zones. However, to achievemeasurable gains against climate change over time,CCS will need to be deployed at a commercial scale thattakes advantage of the range of existing geologic capac-ity6. Therefore, the design and application of financialrisk management mechanisms for CCS must balanceincentives that foster early deployment with the poten-tial for adverse site selection due to moral hazard,7 par-ticularly as commercial-scale deployment evolves. Forthis reason, eventual financial risk management mecha-nisms for CCS must be sensitive to issues of scalability,including the range and magnitude of potential risksacross varied industry sectors and geographic areas,the suitability of different financial mechanisms andcross border or cross-jurisdictional impacts involved.

While a multitude of public, private, and public-private financial risk management frameworks havebeen designed and implemented over the years in an at-tempt to manage environmentally related risks, nonehas successfully addressed the combined goal of assur-ing sufficient funds to pay for needed corrective action

4 Congress has the authority to establish a federal govern-ment corporation pursuant to the Government CorporationControl Act, 31 U.S.C. 91. Congress has exercised this author-ity, and preceding authority, numerous times in history, in-cluding, but not limited to the creation of Millennium Chal-lenge Corporation, Tennessee Valley Authority, and UnitedStates Enrichment Corporation. For a complete list of currentgovernment corporations, see 31 U.S.C. 91, Subtitle VI. For re-lated information about complex energy security circum-stances similar in some ways to the complex global security,trade, technical, scientific, and economic situation created bythe attempts to adjust energy source supply such as coal firedpower, see ‘‘The End of USEC’s Golden Days,’’ Oct. 5, 2007,for a discussion of related challenges created by issues involv-ing nuclear material reprocessing and international trade in-volving United States Enrichment Corporation, available athttp://www.stockinterview.com/News/10052007/End-USEC-Golden-Days.html.

5 Here the term ‘‘fit’’ refers to the fit in the context ex-pressed in Young, supra n. 3—that is, the fit and ability of theinstitution to execute the public policy goal.

6 See Statement of congressional testimony of Michael Goo,climate legislative director for the Natural Resources DefenseCouncil, to the House Committee on Energy and CommerceSubcommittee on Energy and Air Quality, July 10, 2008 (133DEN A-6, 7/11/08).

7 Moral hazard refers to the specific situation where therisks of an unplanned event increase, because the responsibleparty is (partially) insulated from being held fully liable for re-sulting harm. If CCS facilities are not held completely respon-sible for the consequences of their actions, arguably they willbe less careful in their siting and operating decision. There-fore, the incentive to capture, transport, site/characterize, andinject carbon dioxide in an environmentally sound and protec-tive manner may be diminished. The potential for risk in-creases because the chances of an unpredictable event occur-ring due to poor siting/operating decisions increases.

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in perpetuity while addressing the potential for long-term, multimedia liability in a manner satisfactory tostakeholders. That said, a subset of financial manage-ment frameworks have proven to be (a) effective intheir ability to foster operating decisions designed tosubstantially manage and mitigate risks, and (b) eco-nomically efficient in their application to pay for re-sidual risks when they manifest.

It is in this context and in the reality of climatechange that financial risk management options for CCSare assessed. Discussion of the mechanisms is madewith an eye toward balancing the desire of stakeholdersto reduce carbon dioxide emissions, while maintaininga safe, secure, reliable, and relatively inexpensivesource of electric power.

The United States has a long history of legislating li-ability and financial risk management regimes, thoughthese regimes tend to be limited in their ability to meetthe combined goal of fit, interplay, and scalability. Asubset of these regimes have been cited as appropriatemodels for the development of a long-term financialrisk management framework for CCS. This article re-views these regimes; assesses the strengths, weak-nesses, and lessons learned; and offers a suggested con-ceptual solution appropriate for CCS. In sum:

1. Appropriate analysis is needed to estimate the ex-pected value of financial consequences that mayarise from CCS sites.8

2. The financial risk management framework shouldalign with the CCS project lifecycle, whereby theCCS facility remains financially responsible forconsequences arising during the operationalphase from capture through post-closure. Specifi-cally, the operator should demonstrate the abilityto manage such risks, technically and financially,using well tested first-party assurances basedupon financial capacity or third party mecha-nisms, such as annually renewable insurance poli-cies. However, because CCS is what the financialservices sector calls a specialty or nonstandardrisk, only a small part of the sector is equipped andqualified to analyze the risks and place capital atrisk thereon. Thus, to assure sufficient participa-tion and capital commitment for these risks fromthe financial services sector (through insurance,etc.) and the operating industry, a process similarto that followed with the advent of nuclear powerrisk management may be necessary, including an-titrust waivers for participating parties.

3. With respect to siting, operational oversight, andlong-term stewardship of CCS facilities, a private/public government (mixed ownership) corporation(CCS Safety Board or CCSSB) should be charteredand vested with the authority to oversee the siting,design, and management of CCS facilities.

4. The multimedia, cross jurisdictional nature of CCStechnology results in diffuse authority spanninglocal, state, and federal agencies, including but not

limited to the Department of Energy, Environmen-tal Protection Agency, Department of the Interior,and Department of Transportation. The CCSSBshould be vested with the authority to arbitratepermitting/operating issues spanning these myriadauthorities, as well as be vested with the responsi-bility of instituting ‘‘go’’ or ‘‘no-go’’ decisions withrespect to CCS projects, even if such decisions re-sult after the CCS project is underway.

5. A trust fund (CCS National Trust), managed by theCCSSB, should be established to pay long-termcare expenses and delimited compensatory dam-ages resulting after the CCS facility is releasedfrom post-closure, but not for financial assuranceduring the revenue generating operating period.

6. Unless contributions to the trust map to the ex-pected value of expenses/damages likely to be in-curred over the long-term, there is little financialassurance that the balance of funds remaining atthe time of site transfer will be appropriate to thelong-term need for funds.

7. Consideration should be given to the liability andfinancial responsibility implications of industrypooling of sites based on geographic region, or sitecharacteristics.

8. Consideration also should be given in determiningthe degree to which financial contributions to thetrust release the CCS facility from legal liability.

These recommendations are not dissimilar to currentprovisions governing the Oil Spill Liability Trust Fund(OSLTF) and the National Pollution Funds Center(NPFC) mandated by the Oil Pollution Act of 1990,9 orthe Presidio Trust, established by Congress in 1996 asan independent management entity to preserve the Pre-sidio’s natural resources.10 Further, the aforementionedrecommendations could be extended and applied in adifferent country context, provided that local issues offit, interplay, and scalability are considered adequately.China and India continue to expand their use of coal,further increasing the importance of establishing a wellworking CCS program in the United States. Ultimately,it may be necessary to export U.S. CCS technologies,risk management frameworks, and policies to othercoal burning nations, including China.

II. Introduction—The Case for Cleaner Coal

A. Why Focus on Cleaner Coal?A convergence of circumstances support and encour-

age the need to explore opportunities to reduce green-house gas emissions generated by the electric powergeneration industry. First, energy demands and eco-nomic efficiency support the use of all available naturalresources, including the continued use of fossil fuel incombination with alternative, renewable fuel technolo-gies.

Second, the sheer amount of coal reserves present inNorth America suggests that continued use of coal maybe critical to energy security. Further, dependencies oncoal for revenues and power generation are concen-8 Expected value should incorporate the probability of ad-

verse events occurring. Expected financial consequences in agiven year is calculated as the product of potential financialconsequences multiplied by the annual probability of occur-rence. Results for each year are summed over the relevant timeperiod and discounted to generate an expected value of finan-cial consequences.

9 Oil Pollution Act, Pub. L. No. 101-380, Aug. 18, 1990, codi-fied at 33 U.S.C. 2701 et seq.

10 16 U.S.C. 460bb Appendix (enacted as Title I of H.R.4236, Pub. L. No. 104-333, 110 Stat. 4097, Nov. 12, 1996).

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trated in specific regions of the United States, andacross the globe. The resulting socio-economic and po-litical tensions are such that eliminating the use of coalaltogether is simply not a viable option. Notably, theUnited States has invested heavily in its fleet of coal-fired power plants: a total of 1,493 active coal-fired elec-tric power plants were in operation in 200711, many ofwhich have significant residual operational value. Ceas-ing operations and abandoning these plants would re-sult in thousands of stranded assets, representing an in-efficient use of billions of dollars in invested capital andplacing tremendous strains on regional economies.

The volume of emissions attributable to coal-firedpower plants is substantial.12 To permit these facilitiesto continue operating without any means of effectiveemissions controls dooms global efforts to reduce an-thropogenic carbon emissions and hinders society’s at-tempts to avert continued and predicted worsening cli-mactic change. On a global scale, the International En-ergy Agency forecasts that more than $5 trillion will bespent globally on new power plants in the next 25 years.This estimate includes 1,800 gigawatts of new coalplants that will increase the amount of coal power usedby 50 percent over today’s usage portfolio. Unless perplant emissions are reduced through technological ad-vances, such as process changes or geologic sequestra-tion, greenhouse gas emissions from coal fired powermay increase by 50 percent, which will make the com-mitment to achieve a 50 percent reduction in green-house gas emissions agreed to by the United States dur-ing the meeting of the Group of Eight in Tokyo quitehard to achieve given the contribution of coal poweredelectricity to the United States’ greenhouse gas foot-print13.

To preserve economic stability, ensure returns on in-vested capital, and address political resistance to theconversion to a low(er) carbon economy, a rational ap-proach to manage carbon dioxide emissions from coal-fired power plants is essential. Specifically, to effectu-ate material reductions in greenhouse gas emissionsand avoid stranded assets, the effective use of coal dic-tates commercial-scale deployment of CCS technology.The adoption of this technology also is critical to theeconomic future of states that mine coal and dependheavily upon electricity from coal fired facilities. Nota-bly, the Intergovernmental Panel on Climate Change(IPCC) identified carbon capture and storage, and spe-cifically geologic sequestration, as one of the more tech-nically viable technologies to mitigate climate change.14

Additionally, to avoid unanticipated, unquantified in-tergenerational transfer of risk from CCS processes, de-velopment of a rational, disciplined approach to the de-sign and implementation of a financial risk manage-ment framework that supports the continued use ofcoal-fired plants with new and emerging CCS technol-ogy is essential.

B. Impact, Global Dominance of Coal-Fired PowerThe Earth’s climate is changing. Evidence of this

change exists in the increase in average global air andocean temperatures, widespread melting of snow andice, and rising global average sea levels.15 Consider, theIPCC documents that annual emissions of carbon diox-ide have grown by approximately 80 percent between1970 and 2004. In 2005 alone, the atmospheric concen-trations of carbon dioxide and methane exceeded thenatural range over the last 650,000 years.16 Leading sci-entists suggest that anthropogenic greenhouse gasemissions should be reduced by 50 to 85 percent below2000 levels by 2050 to mitigate the risks of climatechange.17 Electric power generation is one of the majorsources of anthropogenic carbon dioxide emissions,representing approximately 33 percent of U.S. carbondioxide emissions.18

Coal-fired power accounts for approximately 50 per-cent of the electric power supply in the United States.19

The Electric Power Research Institute (EPRI) has evalu-ated the future projected demands for electricity, in-cluding the capacity for expansion within the power in-dustry, and has concluded that coal remains a substan-tial source of power for the next 100 years.20

Specifically, according to the National Mining Associa-tion, coal represents nearly 95 percent of the UnitedStates’ fossil energy reserves.21 Based on recoverablecoal reserves of approximately 275 billion tons, esti-mates suggest that the United States can supply enoughenergy at current recovery and usage rates to satisfy do-

11 U.S. Energy Information Administration Electric PowerAnnual Report, Table 2.2, Existing Capacity by Energy Source,Oct. 22, 2007, available at http://www.eia.doe.gov/cneaf/electricity/epa/epat2p2.html.

12 Revis James ‘‘The Full Portfolio,’’ Electric Perspectives,EPRI (January/February 2008).

13 The leaders of the Group of Eight industrialized coun-tries agreed July 8, 2008, to seek a 50 percent reduction ingreenhouse gas emissions worldwide at the U.N.-sponsoredclimate negotiations in 2009. The G-8 leaders did not committo reducing their own emissions absent a global agreement(131 DEN A-1, 7/9/08).

14 The process of geologic sequestration involves capturingcarbon dioxide generated from fossil fuel combustion, inject-ing it deep underground and sequestering the carbon dioxidein geologic reservoirs indefinitely. Intergovernmental Panel onClimate Change, Special Report on Carbon Dioxide Captureand Storage, prepared by Working Group III of the Intergov-

ernmental Panel on Climate Change (Metz, B.,O. Davidson, H.C. de Coninck, M. Loos, and L. A. Meyer (eds.) Cambridge Uni-versity Press, 2005).

15 Climate Change 2007: Synthesis Report. An Assessmentof the Intergovernmental Panel on Climate Change, November2007. It is not the authors’ intention to endorse the IPCC reportin this or any other footnote where it is cited, but to suggestthat prudent businesses will take the data and predictions veryseriously.

16 Id.17 Reducing global carbon dioxide emissions by 50 to 85

percent below 2000 levels is expected to result in global aver-age temperature increases between 2.0 and 2.4 degrees Celsius(or 3.6 to 4.3 degrees Fahrenheit). According to the IPCCWorkgroup Group II, increases in global average temperatureexceeding 1.5 to 2.5°C ‘‘are projected to [result in] majorchanges in ecosystem structure and function, species’ ecologi-cal interactions and shifts in species’ geographical ranges, withpredominantly negative consequences for biodiversity andecosystem goods and services, e.g. water and food supply.’’Climate Change 2007: Synthesis Report. An Assessment of theIntergovernmental Panel on Climate Change, November 2007.

18 Revis James, ‘‘The Full Portfolio,’’ Electric Perspectives,EPRI, January/February 2008. See also, Steven Specker, ‘‘Elec-tricity Technology in a Carbon-Constrained Future,’’ EPRI,February 2007.

19 Id.20 Id.21 Available at http://www.nma.org/statistics/pub_fast_

facts.asp.

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mestic demands for 200 years.22 The dominance of coalas an energy source is unquestionable, and it is not lim-ited to the United States. At the current rate of produc-tion, global coal reserves are estimated to last for an-other 150 years.23 Further, Chinese and Indian de-mands for electric power are expected to increasedramatically over the next 50 years; it is accepted gen-erally that coal will power this expansion24

If the recommended anthropogenic greenhouse gasemissions reductions are to be achieved, a means forachieving these reductions from coal-fired power is es-sential. CCS offers a technologically viable option forachieving society’s goal of cleaner coal.

C. Valuing and Pricing Low Carbon Power:How Willing is Society to Pay for Clean Coal?

In general, today’s society is structured around a fos-sil fuel paradigm. Leading scientists attribute a signifi-cant amount of the worldwide increases in atmosphericgreenhouse gas concentrations to the world’s increas-ing use of and continued dependency on fossil fuels.Without significant public policy intervention this de-pendency is not likely to abate anytime soon.

Notably, the activities that emit the greatest amountsof greenhouse gases involve what developed economieshave come to consider essential services—power, wa-ter, and transportation. To reduce greenhouse gas emis-sions without effecting a shift in energy consumptionpatterns, leading scientists assert that the underlyingnature of the fuel that powers the base load energy sup-ply for developed and emerging economies mustchange. In other words, a structural shift in how societygenerates energy is needed in order to consume more,but emit less. This structural shift comes at a price. Al-ternative fuels that emit less greenhouse gas (and car-bon) all cost more than their fossil fuel (coal) counter-part.25

Nonetheless, for some the perceived value of greenenergy outweighs viable, cost-effective options result-ing in clean coal.

As such, climate change is causing more than in-creased temperatures and rising sea levels. Climatechange is forcing a shift in societal perceptions of whatit means to pay for energy and other essential services.Beyond the simple tangible cost of electricity, naturalgas, or oil, increasingly consumers are aware of the in-tangible cost of their energy decisions. Consumers arebeginning to fully absorb the influence of product life-cycle and concomitant costs on the price they pay forfuel.

Society’s willingness to pay for energy derived fromfossil fuel combustion increasingly is impacted by theintangible environmental and ecological impacts of

their consumption patterns. Essentially, consumers arebeginning to add the cost of public good degradationinto their cost of service calculus. The challenge is so-cially pricing that for which there is no economic sub-stitute . . . the atmosphere that protects us and the airwe breathe. The bottom line? Consumers in developedeconomies are weighing how their everyday choicescontribute to a cleaner, greener world. These same con-sumers will be asked to place a value on their clean,green world, which begs the question—how much willthey truly be willing to pay for clean coal?26

Ensuring the advancement and deployment of CCSon a scale large enough to reduce greenhouse gas emis-sions is simply not enough. The challenge will be to en-sure the efficient, cost-effective, and sustainable de-ployment of CCS within the existing regulatory frame-work and societal structure. The market must confirmthat CCS technology is financially viable. Utility ratepayers must be willing to pay for carbon dioxide cap-ture and sequestration in the form of increased pricesand/or public policymakers must be willing to balancethe costs of carbon dioxide capture and storage througha rational financial risk management framework.

Further, advocates of CCS, including developers andoperators, must respond to public concerns regardingthe short- and long-term environmental health andsafety risks of CCS as a greenhouse gas mitigationstrategy. This likely will be accomplished if, and only if,transparent analyses of risks and attendant valuation offinancial consequences are communicated to the pub-lic. The suggested framework suggested herein is de-signed to engender this level of transparency. Society’swillingness to substitute clean coal through CCS forother alternative fuels is predicated on whether it be-lieves the upside benefits of CCS outweigh the potentialdownside risks.

D. Regulation of Essential Services Constrains OptionsBy their very nature, essential services are of great

public interest. Essential services—power, water, andtransportation—are the subject of significant policy de-bate and often are highly regulated at the federal andstate levels. Regulations underpinning these servicesrange from price controls, subsidies, and tax incentivesto restrictive legal frameworks intended to protect hu-man health, ensure safety, and mitigate adverse eco-logical impacts. Tension arises when legislative deci-sions that foster financial and economic stability fail tobalance equal protection of human health and the envi-ronment or result in unequal risk sharing. For example,legislative actions that provide for broad-scale indem-nity or other financial subsidy send a signal that it is ap-propriate for the private sector to bear less than the fullprice of risk for their actions. This tension is further ex-acerbated when the indemnity or subsidy involves valu-ation of a natural resource with public ownership andfor which there is no economic substitute, such as thestability of the world’s climate.

In such cases, policy choices underpinning legislativeaction can result in economically inefficient decisionsthat do not appropriately weigh financial market con-siderations with social welfare impacts. It may be that

22 The Coal Based Generation Stakeholders Group, A Vi-sion for Achieving Ultra-Low Emissions from Coal-FueledElectric Generation (2005). See also, National Energy Technol-ogy Laboratory Key Issues & Mandates Clean PowerGeneration—Market and Policy Drivers,, available at http://www.netl.doe.gov/KeyIssues/clean_power2.html.

23 World Energy Council, 2007 Survey of Energy Resources.24 Netherlands Environmental Assessment Agency, China

Now No. 1 in CO2 emissions; USA in Second Position, June2008. Available at http://www.mnp.nl/en/publications/2008/GlobalCO2emissionsthrough2007.html.

25 Vattenfall’s Climate Map 2030 (2007), available on theWeb at .http://www.europarl.europa.eu/document/activities/cont/200803/20080305ATT22990/20080305ATT22990EN.pdf.

26 Lindene E. Patton, Beyond Rising Sea Levels: The Impor-tance of the Insurance Asset in the Process of Accelerating De-livery of New Technology to Market to Combat ClimateChange, European Business Review, May/June 2008.

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society as a whole agrees that payment for a sharedpublic good is appropriate. Such payment may occur inthe form of base load portfolio standards, price sup-ports, taxes, cap-and-trade, and/or loan guarantees. Un-fortunately, some subsidies encourage the creation oflegal structures that increase financial risk as a neces-sary condition of qualification for the subsidy. As such,selection of subsidy, including risk management and fi-nancial assurance mechanisms, must be done withgreat care, lest the wrong structure create additional orunexpected risk.

III. Design Considerations for Effective, EfficientFinancial Risk Management Framework

To properly design financial risk managementmechanisms for any activity, understanding the projectlifecycle, the risks that may manifest at each stage ofthe lifecycle, the expected present value of financialconsequences, and the subject legal environment is es-sential. Collectively, these components inform the needfor financial assurance and influence the selection of fi-nancial mechanisms with the greatest likelihood ofavoiding problems of fit, interplay, and scalability.

When considering the design of financial risk mecha-nisms, it is important to remember that most financialinstruments are ‘‘one-trick ponies’’ designed with onegoal—protecting private party rights, not managingpublic goods. For example, a common financial assur-ance mechanism, the letter of credit, represents a con-tract wherein a bank promises to pay a specified sumupon presentation of specified documents.27 The bankpredicates its decision to issue the letter of credit solelyon the credit worthiness or ability-to-pay of the com-pany purchasing the letter. Generally, the bank is indif-ferent to the physical or engineered system necessitat-ing the financial assurance. If the contractual terms aremet, the bank will pay.

Financial instruments are grounded in the certaintyof contract law. Thus, it is critical to understand whatevents trigger the ability to call due the financial instru-ment and memorialize such events in a manner withoutambiguity. While these objectives may appear to becommon sense, designing financial mechanisms that re-alize these objectives is not a trivial exercise. The pre-sumption is that traditional financial assurance instru-ments are designed to hedge the risk of an owner or op-erator defaulting on its financial obligations. However,relatively few financial assurance instruments are de-signed as ‘‘promise to pay’’ or financial guarantees.28

The challenges of fit, interplay, and scalability become

even more challenging when the events triggering theneed for financial responsibility may not manifest fortens or hundreds of years, likely after the corporate ac-tor ceases to exist.

In the world of CCS, the goal is to store carbon diox-ide permanently. In service of this goal, stakeholdersseek assurances that funds will be available to pay forthe activities necessary to minimize the potential for re-leases of carbon dioxide post-injection and to detectproblems before they adversely impact public welfareor the environment. In addition, significant public de-bate has centered on financial assurance for (un)fore-seeable corrective action and compensation for dam-ages resulting from the failure to store the carbon diox-ide as planned. As described below, the consequencesof failing to sequester carbon dioxide fully range frompotentially impairing private rights to impairing publicgoods for which there is no economic substitute, thestability of our climate and the air we breathe. Whereno private right is affected and no economic substitutereadily available, the design of an effective, rational, fi-nancial risk management framework, be it public or pri-vate, is challenging.

If CCS is to be a vehicle for striking the political bal-ance necessary to gain carbon dioxide emissions reduc-tions, the financial risk management framework mustbe designed carefully and needs to comprise multiplesingle goal components. Only through a blend of finan-cial mechanisms targeted to discrete phases of the CCSproject lifecycle will society achieve its desired goals—protecting both private and public goods from harmand damage in the short and long term. No single finan-cial mechanism or risk management technique canspan the timing and range of potential financial conse-quences arising from CCS, which include the costs ofclosure, post-closure, and foreseeable corrective action,as well as potential compensatory damages resultingfrom carbon dioxide leakage post-injection.

A key first step in designing an effective financial riskmanagement framework for CCS is defining the projectlifecycle (technologies and their implementation), in-cluding the risks manifested by each phase of operationand possible consequences, both when the technologiesperform as intended and in the event of operational ex-ceedances. Risks/consequences arising from naturally-occurring events, including acts of God and other con-ditions of force majeure, also need to be considered aspart of the design process.

Once the project lifecycle and attendant operationalconditions are defined, consequences and associateddamages to private and public parties and goods shouldbe segregated according to the project’s risk profile, in-cluding:

s time profile—when such events could occur,s frequency profile—how often such events are ex-

pected to occur, ands severity characteristics—the magnitude of dam-

ages that may result.This mapping exercise, when adjusted in light of the

applicable legal liability scheme, will reveal the likeli-hood and materiality of financial consequences byphase across the project lifecycle. These consequencesunderpin the pricing, and therefore face value, of the fi-nancial assurance instruments, including how much

27 Corp. Counsel’s Guide to Letters of Credit Section 1:2.28 While financial instruments generally are designed with

a single goal, the practical application may yield widespreadunintended behavioral consequences. Some of these conse-quential impacts may inure to the benefit of the public good ofinterest. For example, financial instruments may be void in theevent such instruments are procured by fraud; minimizingfraud generally serves a public benefit. However, policymakersoften seek to use a single financial instrument to attempt to in-centivize both the directly affected behavior controlled by theinstrument and the desired behavior involving public goods.Often, the use of a single instrument will fail to achieve bothobjectives for very practical realities involving politics. For ad-ditional insights into the issues inherent to traditional financialassurance instruments for the management of hazardouswaste see Lindene E. Patton and James L. Joyce, HazardousWaste Financial Assurance: A Comparison of Third-Party Risk

Management Mechanisms—Suggestions for Reform (114 DENB-1, 6/13/08).

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money will be needed, when, and for whom. Implicit inthis analysis is a superior understanding of the existinglaws that define responsibility and liability for intendedor unintended damages arising out of operational ac-tivities. Because the legal liability scheme underpinningcarbon emissions in the United States is in flux, this cal-culus has an additional uncertainty characteristic.Third-party risk transfer instruments may be able to as-sume some of this political/regulatory risk.

A. CCS Project Lifecycle, Associated RisksA key component of ensuring the advancement and

deployment of CCS on a scale large enough to reducegreenhouse gas emissions will be to frame the potentialeconomic and ecological risks that exist, as well as anyassociated losses that may result from site-specific CCSprojects. In so doing, rigorous and defensible valuationof near- and long-term financial consequences is pos-sible. Markets by their very nature seek certainty. Iden-tifying the residual risks on a prospective basis that areunique to CCS and can not be managed using existingphysical risk management techniques, is essential toachieve market certainty. The key is determiningwhether the long-term residual risk tail for a particularCCS site will be skinny or fat.29

As illustrated in Figure 1, the CCS project lifecyclecomprises three discrete phases, each of which lendsthe potential for risk and consequences. The public de-bate surrounding CCS has centered largely on the lastphase, sequestration, due to the combination of (un-)foreseeable events that may arise post-injection andcontribute to cross jurisdictional, multi-media liability.Nonetheless, design of a CCS financial risk manage-ment framework warrants discussion of the range ofrisks and impacts across all three phases.30

Phase 1: Risks at Point of Generation/Carbon DioxideCapture Improper venting of carbon dioxide, leakage atthe capture point, other technological failures causingadditional property damage or bodily injury in additionto the carbon dioxide, or catastrophic weather eventsmay result in supply chain interruptions or demandsurges for energy. In general, these risks are standardproperty and casualty/pollution risks associated with anoperating facility. Under existing financial risk manage-ment frameworks, these risks either are directly re-tained by the operator or are managed regularly withstandard private third-party risk transfer mechanisms(e.g., bonds, insurance).

Under a legal regime with carbon constraints, the fa-cility operator may face additional financial exposure,e.g., the required purchase of offsets, penalties/fines, if

29 A ‘‘skinny tail’’ refers to a loss profile, whereby attendantrisks have been mitigated and managed to the point where theloss profile visually presents as a tail along the x-axis that de-clines asymptotically in the out years. Although the possibilityof a catastrophic loss remains, the likelihood or frequency ofsuch an event becomes increasingly small over time due tosound risk management practices. For example, to allow con-struction only in non-flood plain areas, or to only allow build-ing in flood plains using construction techniques designed toavoid damage (structural and otherwise) minimizes risk. Thus,when a flood occurs the likelihood of loss is lowered, but it isacknowledged that if a loss occurs it will be severe. Situationsinvolving low frequency, catastrophic risks are well managedby a specialty approach to underwriting that requires highlyprotective risk management strategies, and tend to benefit sig-nificantly from pooling. By contrast, a ‘‘fat tail’’ manifestswhen risks of potentially great severity are not otherwise man-

aged or mitigated resulting in potentially increased frequencyand/or severity over time. The ‘‘fat tail’’ is characterized bymoderate to high frequency catastrophic risks and no amountof pooling can spread the risk. Examples of such situations in-clude knowingly building in flood plains, regularly permittingbuilding in areas of high fire danger, and in the context ofCCS, siting projects in sensitive environments or in unstablegeologic structures. The challenge is to optimize the amount ofrisk management effort expended with the pooling techniqueto arrive at the optimally economically efficient risk manage-ment framework in the short and long term.

30 Elizabeth J. Wilson, Mark A. De Figueiredo, Chiara Tra-bucchi, Kate Larson. Liability and Financial ResponsibilityFrameworks for Carbon Capture and Sequestration, WorldResource Institute: WRI Issue Brief Carbon Capture and Se-questration, No. 3 (2007).

Figure 1. CCS Project Lifecycle 29

Capture Transport Sequestration

(Storage)

Siting/

Design

Operation

(CO2 Injection)

Long-Term

Stewardship

Closure

& Post-Closure

~1 year 1 to 30 years Defined Indefinitet

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its allowances are exceeded. If such exceedances occuras the result of an insured property or casualty event,the business interruption coverage extensions on pri-vate insurance policies may be expanded to includecompensatory damages or in-kind replacement obliga-tions. Likewise, under certain situations, the entity mayface adverse pre-treatment, treatment, or disposal costsif higher-than-expected impurities remain in the carbondioxide stream making it unsuitable or unacceptable forCCS without further action.

Phase 2. Risks During Carbon Dioxide Transport. Thepotential for leaks during the transport of carbon diox-ide from the point of generation (capture) to the seques-tration (storage) site exists. Eventual transportationnetworks likely will travel through a combination ofheavily populated areas, as well as potentially ecologi-cally sensitive areas. Further, the corrosive nature ofcarbon dioxide when mixed with water under certainconditions such as colder climates may contribute tothe risk of pipeline fractures. Such leaks may result inecological, human health, and property-related conse-quences that may have substantial financial implica-tions. Further, carbon constraints can add to the poten-tial for first-party financial damages. Similar to therisks outlined above for carbon dioxide capture, theserisks are standard property and casualty/pollution risksassociated with an operating facility that either are di-rectly retained by the operator or are regularly man-aged with standard private third-party risk transfermechanisms (e.g., bonds, insurance).

Phase 3. Risks During Carbon Dioxide Sequestration. Asillustrated in Figure 1, sequestration of carbon dioxideinvolves a series of four activities: (1) siting/design, (2)operation (carbon dioxide compression and injection),(3) closure/post-closure, and (4) long-term site steward-ship. Notably, significant debate has focused on the tim-ing of these activities, such as when one activity endsand the next activity begins. Not surprisingly, the ma-jority of the discussion has centered on when post-closure ends and long-term site stewardship begins. Itgenerally is accepted that the transition from post-closure to long-term site stewardship will involve dem-onstration of certain performance-based criteria by theCCS facility, with the eventual long-term managementof minimal residual risk by a third-party entity. At issueremains the timing and nature of the demonstration,and the lack of a clear understanding of what a ‘‘re-lease’’ from post-closure truly entails.

Financial certainty regarding the evolution of risk,consequences, and financial responsibility declines asthe project moves through its natural lifecycle from sit-ing to long-term stewardship. The fit, interplay, andscalability of various financial instruments shift in re-sponse to the evolution of the CCS project lifecycle.Further, the alignment of financial instruments betweenand among the various project phases will vary substan-tially based on site-specific and geopolitical character-istics. For this reason, the financial mechanisms under-pinning an eventual financial risk management frame-work for CCS will need to be a blend or series of singlegoal instruments that address the unique fit, interplay,and scalability issues posed by each of the activitieslisted below.

1. Siting/Operation (Carbon Dioxide Compression,Injection)

The degree to which the long-term risk tail for CCSsites truly is minimal (or skinny) will depend on near-term decisions involving the siting and operationphases of the sequestration process. Further, the degreeto which CCS facilities are incentivized to integrate riskmanagement mitigation strategies as part of their sitingand operational decisions will undoubtedly influencethe site-specific long-term risk profile. If the operatorhas little or no financial risk resulting in a zero or lowdollar price indicator with respect to the harm thatcould result from a poor siting selection or managementdecision, then the operator will not put sufficient re-sources toward this part of the process. Instead, theyare likely to only put resources commensurate with theprice indicator.

Significant scientific research and analysis have beendone on the risks associated with carbon dioxide injec-tion and storage. Notable financial and economic dam-age risk pathways include, but are not necessarily lim-ited to: (1) induced seismic activity, (2) surface/subsurface trespass, (3) groundwater contamination,(4) property damage resulting from geologic explora-tion, or ground heave, (5) asset infringement, where thevalue of an existing surface owner’s oil, gas, or storagerights is diminished, (6) bodily injury and/or property orecological damage resulting from catastrophic (acute,high quantity) release, and/or (7) bodily injury and/orproperty or ecological damage resulting from chroniclow volume releases.

As with the capture and transportation phases, theoutlined risks attendant to the compression/injectionand storage phases of the operations are similar to stan-dard property and casualty/pollution risks associatedwith an operating fossil fuel or chemical facility. Theexception with respect to CCS projects involves the un-derground nature of the containment zone—all moni-toring techniques are necessarily indirect. Conse-quently, it is more difficult to devise a means by whichthe facility can monitor and evaluate operational condi-tions and the continued integrity of the containmentzone. Because CCS is what the financial services sectorwould call a specialty risk, only a small part of the sec-tor would be equipped and qualified to analyze the risksand place capital thereon. Thus, to assure sufficientparticipation and capital commitment from the finan-cial services sector (through insurance, etc.) and the op-erating industry for these risks, a process similar to thatfollowed with the advent of nuclear power risk manage-ment, including antitrust waivers for participating par-ties, may be necessary.2. Closure/Post-Closure

The characteristics of carbon dioxide injection andstorage are not dissimilar to those associated with en-hanced oil recovery and natural gas storage facilities.Prevailing scientific thinking is that the activities asso-ciated with well plugging and abandonment (closure),as well as post-closure monitoring for CCS are likely tobe the same as those for enhanced oil recovery. How-ever, there is an inherent difference between traditionalenhanced oil recovery activities and CCS. Where en-hanced oil recovery is focused on the extraction of anatural resource, the objective of CCS is the permanentstorage of a buoyant substance. Appreciably, enhancedoil recovery activities involve the injection of carbon di-oxide as an extraction technique. However, to achieve

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the anthropogenic greenhouse gas reductions neces-sary to halt climactic change, exponentially greater vol-umes of carbon dioxide will need to be injected andstored than those used in support of enhanced oil recov-ery activities.

Further, the time horizon for CCS projects is substan-tially longer than those traditionally associated with en-hanced oil recovery projects. For this reason, it is likelythat closure and post-closure activities planned in theshort-term will need to be revisited when closure andpost-closure at CCS sites actually occur 10, 20, or 50years from now.

While the array of risks likely to manifest during theclosure and post-closure periods are largely the same asthose likely to manifest during carbon dioxide injection/operation, there is the added risk of changing science.Society’s understanding of what it means to store car-bon dioxide in perpetuity will evolve. For this reason,there is added uncertainty under this phase of the CCSproject lifecycle than under previous phases. For ex-ample, there may be the discovery of some previouslyunanticipated condition 10, 20 or 50 years from nowthat must be addressed (e.g., corrective action issues)but was not contemplated at the time financial assur-ances were provided.

Finally, the design of a financial risk managementmechanism for the closure/post-closure phase pre-sumes an ability to estimate the future expected valueof financial consequences that may arise. Financingrisk associated with the appropriate use of discountrates also warrants consideration.

3. Long-Term Site StewardshipIn addition to the risks identified above under carbon

capture, transport and operation, legal liability may re-sult from the failure of the owner, operator, or devel-oper of the CCS site to permanently sequester carbondioxide. However, unlike the initial phases of the CCSproject lifecycle, the risks of carbon leakage during thepost-injection phase are expected to diminish overtime.31 This shift in the CCS risk profile presents a no-table contrast to the expected accrual of risk in the nearterm during the compression/injection phase. The pre-sumption is that at the time injection operations cease,the CCS facility is likely to be at its maximum risk con-dition.

B. Defining and Valuing ConsequencesThe development of a financial risk management

framework for CCS must be informed by the potentialtiming and expected materiality of financial conse-quences that may arise at CCS sites. Although the pro-cess for estimating financial consequences is conceptu-ally straightforward, doing so in practice for CCS posesnotable challenges.

Specifically, the lack of real, readily accessible, non-private monitoring data can make it difficult to confirm

the magnitude, duration and/or areas that may be ex-posed to a carbon dioxide release. Further, the charac-teristically buoyant nature of carbon dioxide, and its po-tential to travel far afield from the initial injection point,will make it difficult to trace carbon dioxide leaks backto their source. For both of these reasons, the monetaryvalue of potential losses associated with carbon dioxideleakage can be difficult to measure, particularly whenaddressing nonmarket impacts, such as injuries to en-dangered species or ecological resources.

These impacts also can extend well into the futureadding yet another layer of complexity—the extent andduration of related impacts in future years. Losseswhich will not manifest for years typically are calcu-lated using a discount rate to bring them to presentvalue. However, as noted above, the use of a discountrate introduces an additional layer of financing risk,due to the difficulty in selecting a discount rate todaythat appropriately characterizes the long-term risk pro-file of, as yet unconstructed, CCS sites.

Nonetheless, methods for characterizing and valuingfinancial consequences have evolved in a variety of con-texts that are applicable to CCS sites. At a minimum,appropriate consideration in the context of CCS shouldbe given to four categories of impacts, all of which in-volve a combination of public and private goods.

1. Human Health & Welfare Impacts. Leakage poten-tially could result in concentrations of carbon di-oxide or other residual impurities in the carbon di-oxide stream sufficient to cause morbidity or mor-tality. Specific damages that may result includereductions in the quantity or quality of recre-ational activities in affected areas, adverse impactsto commercially exploitable resources (e.g., for-ests, croplands, mineral reserves, oil/gas reser-voirs), and/or restrictions to land use or subsur-face activities. Additional losses could includeclaims for business interruption, asset infringe-ment and diminution in property value throughloss or damage.

2. Ecological Impacts. Leakage at any point during theCCS project lifecycle, and physical disturbancesspecifically during operations, can impact ecologi-cal receptors adversely, resulting in the need forresponse actions to remove or reduce threats tothe surrounding ecology. In some cases, actionsmay be needed to return affected biota or habitatsto expected conditions ‘‘but for’’ the event, i.e.,baseline condition. In other situations, the impactsmay be so severe and the present ecology so de-graded, that a restoration project elsewhere is re-quired to offset the present situation.

3. Atmospheric Releases. Leakage can reduce the cli-mate benefits of capturing carbon dioxide, de-creasing the overall effectiveness of CCS as a cli-mate change mitigation strategy and reversing anyaccrued public benefit with respect to reducingemissions. Further, unanticipated atmospheric re-leases may result in the need for CCS facilities topurchase carbon offsets in an amount sufficient tomatch any increases in atmospheric carbon diox-ide caused by leakage. Some valuation may bemade with respect to legal liabilities established ina common law context. However, an actual valuewould require that the common law recognize thatrelease of carbon dioxide into the atmosphere is in

31 Notably, per the IPCC, ‘‘Observations from engineeredand natural analogues as well as models suggest that the frac-tion retained in appropriately selected and managed geologicalreservoirs is very likely to exceed 99% over 100 years and islikely to exceed 99% over 1,000 years. . . .Similar fractions re-tained are likely for even longer periods of time, as the risk ofleakage is expected to decrease over time as other mecha-nisms provide additional trapping.’’ Intergovernmental Panelon Climate Change, Special Report on Carbon Dioxide Cap-ture and Storage (2005).

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fact a damage which is compensable. Further, ac-tual monetary damages will not exist until the law,common or statutory, recognizes a value to thedegradation of the atmosphere, a public good. Inother words, in the absence of a carbon cap orsome other legal mechanism to define and at-tribute value to the release of carbon dioxide to theatmosphere, valuation of a release is problematicand highly uncertain, ranging from zero dollars topotentially orders of magnitude higher numbers.

4. Impacts to Water Resources. CCS also may ad-versely impact water resources, including potabledrinking water, groundwater and/or surfacewater.Particularly, water resources are at risk if the car-bon dioxide stream escapes the system, if brine orother fluids are displaced as a result of pressurechanges from carbon dioxide injection, and/or ifcontamination occurs due to residual impurities inthe carbon dioxide stream. Financial conse-quences arise from the impaired and/or precludeduse of water resources. In some states, water mar-kets are well established and provide a readymeans for valuing the impairment or loss of waterresources.

The outlined impacts span the CCS project lifecycle,and generally result in numerous potential claimantsand causes of action. Specifically, the CCS facility mayface expenses associated with corrective action and/orcompensatory damages resulting from nuisance, tres-pass, negligence, or other torts related to any single orcombination of impacts. Further, statutory liability in-volving existing environmental legislation, such as theSafe Drinking Water Act, Clean Water Act, Clean AirAct, Resource Conservation and Recovery Act, and En-dangered Species Act, as well as local statutes, also maygive rise to material financial exposure in the form ofremediation expenses and possible damages. Finally,jurisdiction, nature of the harm, and attendant damageswill interact to determine liability, compensability, andwhich (if any) party can transfer, assume, or release theCCS facility from liability.

C. The CCS Risk ProfileThe risk profile for CCS has been the subject of much

debate. Modeled data suggest that for sites that arewell-selected, designed, operated, and monitored, in ex-cess of 99 percent of injected carbon dioxide is verylikely (probability between 90 percent and 99 percent)to remain sequestered for more than 100 years.32

The risks and losses potentially associated with theactivities underpinning the CCS process are distinct intheir profiles: e.g., some are low frequency and cata-strophic in nature, while others are recurring and ofmodest severity. Further, some manifestation of risk re-sulting in harm or injury to private and public goods islikely in the short to medium term, that is, from thepoint in time operation begins to when the CCS facilityis able to make a performance demonstration of reason-able long-term containment of the carbon dioxide. Theabsolute length of time that correlates to ‘short to me-dium term’ is site-specific, and likely will vary from one

year to 50 years to hundreds of years after the facilitystops its injection activities.

Figure 2 represents the risk profile curve that hasbeen cited repeatedly as the eventual risk profile forCCS. When considering risk management options andan eventual financial risk management framework, it isimportant to consider that the profile captured in Figure2 is that of a well-sited, characterized, operated, andmanaged site—a site with significant confidence in pre-dictive modeling, likely injection pressure, and second-ary trapping.

The shape of this curve and magnitude of risks overtime will assuredly vary across CCS sites. In fact, eachCCS project will be affected by unique geologic at-tributes, the spatial area, and the attributes of key re-ceptors in the vicinity of the site. The degree to whichthe CCS facility is able to take precautions during sitecharacterization, operation, and eventual site closurewill influence the degree and probability of forecastedrisks occurring. For example, certain industry sectorsmay present greater or lesser risks, reflecting their ef-fectiveness at removing impurities from their carbon di-oxide stream.

Further, early movers likely will look to site CCSprojects in well characterized zones with the most fa-vorable characteristics33. Doing so represents an eco-nomically efficient, or rational, business decision. Thelikely outcome will be that later actors will be left withless attractive geologic options. Perhaps by that time,new technologies will have created additional risk man-agement options for carbon dioxide generated by coal-fired power plants, or power in general. However, if nobetter solutions present in the intervening period, latemarket entrants may need to perform more advancedpre-treatment activities to obtain acceptable risk pro-files that meet established permitting and underwritingcriteria. Insurance and other third-party risk manage-ment tools used to underwrite financial assurance willsend price signals with respect to the risk differentialbetween well-sited and poorly-sited CCS projects.

It is important to note that at some risk levels, pricingcan not and should not cover the risk differential be-tween types of sites. Instead, physical, i.e., engineeringand operating, solutions will be the most efficientmeans of risk control. In such cases, the CCS site likelywill be denied coverage by third-party providers, andpublic policy makers/regulators should resist the temp-tation to indemnify the CCS operator or waive compli-ance. In the absence of listening to and heeding signalsfrom well-qualified parties who decline to put capital atrisk for CCS operations due to their assessment that therisk is too great or uncontrolled, the uncontrolled riskwould be unaccounted for in the financial markets.Therefore, the risk would transfer to the public andproffer a competitive disadvantage to environmentallysuperior operations. For these reasons, the eventual fi-nancial risk management framework for CCS must bal-ance financial, economic, and regulatory incentives thatfoster early deployment of the technology against thepotential for adverse and increasingly risky site selec-tion as commercial-scale deployment evolves.

The blend of financial mechanisms underpinning thefinancial risk management framework for CCS should

32 Intergovernmental Panel on Climate Change, SpecialReport on Carbon Dioxide Capture and Storage, prepared byWorking Group III of the Intergovernmental Panel on ClimateChange (Metz, B.,O. Davidson, H. C. de Coninck, M. Loos, andL. A. Meyer (eds.) Cambridge University Press, 2005).

33 Sally Benson, Carbon Dioxide Capture and Storage: Re-search Pathways, Progress and Potential, GCEP Annual Sym-posium, October 2007.

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send clear price signals as the risk selection becomesmore adverse to assure that if alternate technologicaloptions for carbon dioxide emission mitigation presentover time, CCS continues to be evaluated in the propereconomic context. No financial risk managementframework should inappropriately subsidize or other-wise provide economic advantage for CCS over future,as yet undeveloped or improved, technologies designedto make coal a cleaner source of power.

In sum, as shown in Figure 3, risks at CCS sites arebelieved to accumulate during the operational phase,and decline as sites move from closure to post-closureto eventual long-term care. Prevailing scientific opinionexpects the tail of the risk profile will diminish, becom-ing increasingly skinny with time. The good news isthat the likelihood that the risk of some events occur-ring that result in an unexpected release of carbon di-oxide more than 10 years after termination of injectionwill become increasingly remote due to geochemistryconditions. Risks of other events, such as seismic or tec-tonic events, should remain constant over time.

A rational financial risk management structure willanticipate the potential for the occurrence of an unex-pected catastrophic event. Just because the tail isskinny does not mean that the risk is eliminated. The‘‘skinny tail’’ simply means that the likelihood of thecatastrophic risk has been minimized, and therefore theamount of capital that must be allocated for the occur-rence of such an event, if many risks are pooled to-gether, is reduced. Without pooling, managing theavailability of funds for that unlikely, low frequencyevent is not provided for, and the default result is an in-tergenerational risk and loss transfer.

By design, a rational risk management solution, in-cluding the attendant financial management mecha-nisms, must be structured to avoid the ‘‘fat tail,’’ thenonzero probability that the risk profile does not dimin-ish with time or, under a worst case scenario, increaseswith time. Designing a permitting and regulatory sys-tem that inadvertently, albeit through a well-intentioned attempt to accelerate deployment of carbonemission abatement technology, creates a fat residualrisk tail when implemented would be an unmitigatedeconomic disaster. An effective structure will addresswho should be responsible for the unexpected ‘‘fat tail’’prior to project inception and design that portion of thefinancial risk management tool accordingly, e.g., to dis-incentivize the approval of poor sites that leave ‘‘fattails’’ and a greater likelihood of large or catastrophicloss.

Finally, it is important to recognize that the potentialfor immediate and measurable harm from CCS does notnecessarily correlate with the magnitude of releases.Relatively large releases could cause no immediate,measurable damages to private property or persons,leaving the damage calculation to focus solely on re-lease of stored carbon dioxide back to theatmosphere—e.g., damages to the public good.34 Con-versely, comparatively small releases in sensitive loca-

34 The ability to value the damage to this public good willbe completely dependent upon the subject legal framework af-fecting the value of such a release, whether that is a cap-and-trade based valuation system or something driven by a com-mon law tort system which develops a theory for valuation ofsame, or both. The less certain the legal scheme defining thisliability, the more difficult this valuation will be.

Figure 2. Risk Profile Curve for CCS Sites32

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tions may cause significant harm, and result in materialfinancial consequences and/or long-term care expensesto remediate natural resources. Such locations may in-clude those near the basements of buildings, close tosurfacewater, groundwater or other valuable mineral orbiological resources, including potentially endangeredspecies.

D. Site-Specific Risk DriversThe timing, magnitude, and array of harm or injury

that may result from CCS processes, as well as the char-acterization of long-term risks will differ by site, de-pending on the specific geologic characteristics of thesite, the nature and volume of the carbon dioxidestream injected therein, and the resultant geochemicalreactions that occur as the supercritical gas seekschemical equilibrium with its new environment. For ex-ample, carbon dioxide streams resulting from technolo-gies that separate the carbon dioxide pre-combustionwill differ from those resulting from post-combustiontechnologies.

Further, site-specific geologic attributes includingcap rock characteristics, mineral makeup, natural andartificial faults, fractures, abandoned wells tectonic ac-tivity, etc., will affect whether, when, and the degree towhich certain risks manifest. Individually and collec-tively, these attributes contribute to the risk exposureprofile of an individual site. Some of these characteris-tics may change over time, and the risks associated witheach component risk may increase, decrease, or remainstatic over time. As such, each CCS site will necessitatea technical and site-specific risk analysis that appropri-ately considers site vulnerability with performance-based endpoints for each assessment, rather than pre-scriptive ‘one-size-fits-all’ evaluation criteria.

Human activity and natural events can introduce ad-ditional risks at any point during the CCS project life-cycle. Therefore, risk analysis must include operationalrisk mitigation actions, including operations and main-tenance activities, institutional controls, and the like, aspart of the overall risk analysis. Appreciably, design

and operational factors that can be directly managed bythe site developer (e.g., well siting, construction, andmonitoring) will mitigate the potential for risk andminimize the occurrence for harm or injury, and atten-dant financial consequences. Such actions and relateddesign criteria necessarily will impact the magnitude ofrequired financial risk management mechanisms.

IV. A Rational Approach to Risk ManagementNearly all industries operate facilities with finite

physical lives. At the center of the public debate regard-ing CCS is the risk that developers, owners, and opera-tors of CCS projects will be unable to pay for the costsof closure, post-closure, corrective action, and/or long-term care, and that such costs will be borne by the pub-lic in the event of bankruptcy, corporate dissolution, orsite abandonment. By virtue of requiring CCS operatorsto bear the cost of safely operating and closing their fa-cilities, these companies will have a financial incentiveto site, design, and operate facilities in a manner thatwill reduce the likelihood of environmental risks fromsite releases, thereby minimizing harm and attendantdamages to public and private goods.

An integrated, effective financial responsibility pro-gram will provide a menu of financial instruments toCCS operators that ensure funds are adequate if andwhen needed, and readily accessible to pay for site op-erational, closure, post-closure, and corrective activi-ties, both now and in the future. An integrated solutionwill blend the strengths of both private and public riskmanagement approaches.

A. Financial Responsibility. The Influence of MarketsGiven the risk characteristics and attendant risk pro-

file associated with CCS, which party is best suited tobear which risks, and at what point in time?

The answer to this question requires a short discus-sion of financial markets and the pricing of risk. In gen-eral, the risks which present themselves across the CCSproject lifecycle are not dissimilar to those created bythe collection, transportation, and injection of fossil fu-

Figure 3. A Different Risk Profile for CCS Sites

Residual risk &the ‘fat’ tail

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els and other chemicals. Further, possible risk mitiga-tion or management strategies are not dissimilar tothose available for such fossil fuels and other chemicaloperations. To date, from a financial risk managementperspective, society has determined that risks of thisnature can be managed satisfactorily by relying on mar-ket forces to demand adequate third-party instrumentsthrough insurance, bonds, etc. or adequate capitaliza-tion. As an implicit requirement, firms seeking invest-ment capital to finance a viable business venture mustdemonstrate the ability to assume and manage properfirst- and third-party risks, and thereby meet the inves-tors’ desire to preserve their investment value. Wheresuch operations are publicly financed and attendantrisk exposure subsidized, no such assertion can bemade.

Essentially, public financing distorts or eliminates theimpact of market forces in determining what is or is nota rational, risk-neutral business venture. As such, pub-lic financing requirements must include additional riskmanagement requirements, such as mandatory pur-chase of third-party instruments or self insurance, tohave the same risk profile result that would emergewith privately financed projects. The consequence ofnot requiring this additional financial risk managementstructure on publicly financed projects is intergenera-tional transfer of risk. Although, in fairness, intergen-erational benefits also may transfer, the key questionshould focus on whether the costs and benefits are inparity.

Certain parts of the financial markets are expert atabsorbing different components of risk. Depending onthe time horizon over which the risks, and attendant fi-nancial consequences, are likely to manifest, capitalmarkets will impute varying risk premia—the expectedrate of return for a given investment above the returnon a risk-free investment. Further, the markets will un-dertake a variety of risk control techniques to reducethe amount of inherent risk in their financing decision.Through a combination of risk avoidance, risk transfer,loss prevention, and loss reduction, market participantswill hedge the chance that their invested capital willdrop in value. Depending on their role in the financialmarkets, participants will offer short-, medium-, orlong-term capital. In general, the shorter the term of thecapital investment, the greater the market segment’stolerance for risk.

Because coal-fired power plants are long-lived assets,financing CCS ventures requires investors with a long-term capital horizon. Typically, investors of this sorthave a very low risk tolerance for the unexpected, un-quantifiable, or for that which may be quantified butwithout great precision. As such, this segment of the fi-nancial markets tend to seek risk-sharing opportunitieswith other market segments demonstrating a higherrisk tolerance. In so doing, the institutional investor isbest able to diversify its investment portfolio and hedgeits overall risk exposure.

Under traditional debt financing, lenders and bondissuers typically require the range of property, casualtyand environmental risk to be bounded, quantified, andaccounted for in the business model—either directly asan expense, or indirectly through the purchase of athird-party financial mechanism, e.g., insurance, thatwill cover losses in the event the risk should manifest.

B. Potential Approach. A Recommended FrameworkNumerous public- and private-sector frameworks ex-

ist to manage risk and mitigate liability. However, withfew exceptions, the existing frameworks pro-activelymanage liability only for operational phases of risk.Few financial provisions are made in these frameworksfor post-operational latent defect discovery or disposalliability. As such, simply extending the current businessand legislative models to CCS without paying due dili-gence to the unique risks that present themselves withnew technologies will result in gaps in coverage. Thesegaps may include, but are not necessarily limited to, li-ability for risks that manifest after the active operationsof the facilities and the associated cash flows have ter-minated.

If not managed effectively, such gaps will place thepublic, and potentially interested private actors, at fi-nancial risk and may result in an intergenerationaltransfer of risk. As a result, in response to the eventualimplementation of a carbon regime, the private sectorwill need to revisit aspects of their risk managementportfolios. In all likelihood, state and federal authoritieswill need to similarly revisit aspects of their legislativeand regulatory frameworks to best manage the eco-nomic, environmental, and social impacts that will re-sult from commercial-scale CCS deployment.

Specifically, uncertainties regarding the short, me-dium, and long-term nature of CCS projects, includinglegal and financial ramifications have been cited as pos-ing impediments to full-scale deployment of CCS tech-nology.35 CCS assumes that carbon dioxide will bestored for a period of time that transcends the life ex-pectancy of humans living today and the typical busi-ness life cycle of many corporate endeavors. As a result,many CCS operators likely will seek to transfer legaland financial liability for their long-term site responsi-bilities. These responsibilities range from financial con-sequences resulting from carbon dioxide migrationfrom the point of capture through sequestration to fu-ture expenditures associated with the cost of long-termcare and monitoring, measuring, and verification. Yet,in the same breath, CCS operators also cite reports thataffirm the long-term safety and security of sequesteredcarbon dioxide, calling into question the need for in-demnity.

To date, the public dialogue surrounding CCS has fo-cused on who will bear financial responsibility for long-term care and site stewardship, including potentialdamage claims and long-term remediation expenses.Interestingly, the dialogue has failed to place similaremphasis on the need to manage financial risks duringthe design and operational parts of the facility life cycle,despite the fact that the risk management systems putin place during these initial phases of the life of the fa-cility assuredly will bound and determine the residualrisk profile of the long term stewardship obligations. Tomitigate long-term tail risk, it is essential that the opera-tional risk management system demand, and financiallysupport proper siting, immediate corrective action, andearly shut down of highly risky facilities; and in so do-ing, avoid continued operation of any facility that poses

35 Elizabeth J., Wilson, Mark A. De Figueiredo, Chiara Tra-bucchi, Kate Larson, Liability and Financial ResponsibilityFrameworks for Carbon Capture and Sequestration, WorldResource Institute: WRI Issue Brief Carbon Capture and Se-questration, No. 3 (2007).

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excessive risk because of institutional inertia or politi-cal tension. To mitigate this risk, the creation of a legis-latively authorized, funded, and empowered private/public board is recommended, chartered as a federalgovernment corporation and charged with a variety ofresponsibilities. The board’s focus should be overseeingthe siting of CCS projects and serving as an arbitratorbetween existing federal agencies authorized to addressissues of technical safety, economic, climate, and eco-logical preservation.

Essentially, an effective financial risk managementframework will assure funds are available to pay for thenecessary activity to:

s Minimize potential releases of the carbon dioxidestream from the geologic zone over the short, mediumand long-term from the time of proper design and sitingthrough post operations and confirmed stabilization;and

s Ensure sufficient monitoring, measuring, and veri-fication values so as to detect problems before they ad-versely impact public welfare or the environment.

An important challenge, however, rests with the con-cept of corrective action for conditions discovered dur-ing the operation, or as a result of latent defects whichmanifest only after the operation of the facility has ter-minated. The dialogue has failed to address the extentto which damages will be redressed, by whom, and upto what limit after the operations of the facility are com-plete – which could be 50 or more years after initial car-bon dioxide injection. This challenge is further exacer-bated by the fact that, in the CCS context, liability is-sues span both federal and state jurisdiction in theUnited States—the nature of the harm and attendantdamages will interact to determine liability, compensa-bility, and which (if any) party can transfer, release, orassume liability. Moreover, the nature of CCS results innumerous potential claimants and causes of action, in-cluding nuisance, trespass, negligence and existingstatutory liabilities. Finally, risk and economic expo-sures resulting from contractual and potential carbonmarket caps—the possible required purchase ofoffsets—add yet another layer of complexity to an al-ready difficult situation.

All of the above listed items create issues of fit, inter-play and scalability when attempting to devise an ap-propriate financial risk management solution forCCS.36 In evaluating financial risk management mecha-nisms for CCS, one must consider the fit of the institu-tion (or risk management tool) for achieving the se-

questration without collateral damage, the effect of in-terplay with existing laws, and the awesome challengescreated by the volume and scale of the carbon dioxidedeposits, as well as the potential for financial conse-quences to span geographic jurisdictions and legal re-gimes.

1. It’s About the Lifecycle. Conceptualizing the Componentsof a Rational Financial Risk Management Framework

The financial risk management framework shouldalign with the CCS project lifecycle, whereby the CCSfacility remains financially responsible for conse-quences arising during the operational phase.

As illustrated in Figure 4, financial and third-party in-struments exist to appropriately manage and hedgerisks that manifest during the operational phases, suchas self-insurance predicated on the financial strength ofthe CCS facility and third-party instruments. These fi-nancial mechanisms are well suited to manage risksthat present themselves when the CCS facility is activeand best able to leverage funds to finance the mecha-nisms. The multiple single goal components of thesetraditional financial mechanisms address the near-termneed for financial assurance, and offer CCS operatorsflexibility in managing their risk portfolio.37 In addition,the costs associated with closure, post-closure, andforeseeable corrective action tend to be reasonably esti-mable on an annual basis, and therefore quantifiableduring the operational phase.

However, careful consideration and appropriateanalysis is needed when estimating the expected valueof these financial consequences.38 The magnitude and

36 It is important to note that these same challenges presentin Europe and Asia, but with different institutional, cultural,economic, and sovereign constructs and paradigms.

37 While financial instruments generally are designed witha single goal, the practical application may yield widespreadunintended behavioral consequences. Some of these conse-quential impacts may inure to the benefit of the public good ofinterest. For additional insights into the issues inherent to tra-ditional financial assurance instruments for the managementof hazardous waste refer to Lindene E. Patton and James L.Joyce, Hazardous Waste Financial Assurance: A Comparisonof Third-Party Risk Management Mechanisms—Suggestionsfor Reform (114 DEN B-1, 6/13/08).

38 Expected value should incorporate the probability of ad-verse events occurring. Expected financial consequences in agiven year is calculated as the product of potential financialconsequences multiplied by the annual probability of occur-

Figure 4. Financial Risk Management Options

Financial Responsibility Mechanisms

CCS Project Phases

Operation(Carbon Dioxide

Injection)

Closure &Post-Closure

Long-TermStewardship

(after prescribedpost-closure)

1. Third-Party Instruments(Trust Funds, LOCs, Insurance, Bonds) � � �

2. Self-Insurance(Financial Test, Corporate Guarantee) � � X

3. Private/Public Frameworks� Insurance Models� Trust/Compensation Funds

X X �

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likelihood of financial consequences—in terms of thecosts of closure, post-closure, and foreseeable correc-tive action, as well as potential compensatory damagesresulting from carbon dioxide leakage duringoperations—will have significant implications on thedesign and application of a financial risk managementframework for CCS facilities. Moreover, the appropri-ate pricing of the financial mechanisms is dependent onaccurate cost estimation. No financial assurance instru-ment, no matter how robust, can overcome the funda-mental problem posed by inadequate or improper costestimation.39 For this reason, consideration should begiven now to the range of expected values, and not asan afterthought when the financial risk managementframework is applied.

Issues arise when attempting to map this traditionalfinancial assurance structure to the long-term steward-ship phase of the CCS lifecycle. Given the long time ho-rizon, and the likelihood that the CCS operator will notbe a viable corporate entity 50 to 100 years after carbondioxide injection has ended, the same financial mecha-nisms that underpin the operational phases are ill-suited to address long-term financial consequences. Forthis reason, a three-part solution to managing the long-term consequences of CCS sites is recommended.

Part 1: Carbon Capture and Storage Safety BoardIt is in this context that the authors recommend the

development of a private/public board (CCS SafetyBoard or CCSSB). The CCSSB should be authorizedlegislatively as a ‘federal government corporation,’chartered and vested with the authority to oversee thesiting, design, and management of CCS facilities and becomprised of no less than nine members,40 includingtechnical experts, government legal experts, private le-gal experts, financial experts (institutional investors, in-surance), and state/federal regulators, with set termlimits of no less than six years.

Specifically, the board should be charged with per-forming a minimum of four critical functions: (1) over-see siting of CCS facilities, including the right and re-sponsibility to suspend or close poorly performing orexcessively risky sites,41 including risks related to fi-nancial assurance; (2) mediate operational/permittingdisputes; (3) certify completion of key project mile-stones, e.g. closure/post-closure; and (4) accept even-tual title to CCS sites, including attendant financial re-sponsibility for long-term care. By virtue of this author-

ity, the CCSSB is incentivized to foster siting andoperating decisions that consider risk and minimize thepotential for residual injury at the time of site transfer,because in the absence of doing so, financial responsi-bility for corrective action and compensatory damagesrests with the board.

Part 2: A National Trust for Prospective RiskA national trust fund (CCS National Trust) also

should be established to pay long-term care expensesand delimited compensatory damages resulting afterthe CCS facility is released from its post-closure obliga-tions. The CCSSB should be vested with managementauthority over the trust.

Financing of the trust should be based on a combina-tion of: (a) initial authorizing funds, (b) a flat per unitfee on carbon sequestered during the operating life ofthe CCS facility42, and/or (c) a transaction fee for car-bon trades similar to the Securities and Exchange Com-mission surcharge currently in effect for stock transac-tions. Fee collection is suspended when the trustreaches a maximum dollar threshold, and resumeswhen accumulation falls below a prescribed minimumthreshold. The balance of funds should be mandatedbetween a maximum and minimum financial thresholdthat appropriately integrates the expected value of fi-nancial consequences that may arise from CCS sites.

Part 3: Additional Enabling LegislationIn addition to authorizing legislation for the CCSSB

and the CCS National Trust, additional enabling legis-lation should establish:

� Liability provisions, whereby the CCS facility re-mains liable for all damages and remediation ac-tivities during the operational phase, and cost re-coveries are deposited into the trust;

� Damage thresholds, whereby responsible partiesare responsible for consequences up to a dollarthreshold per occurrence plus remediation costs;

� Evidence of financial responsibility for the operat-ing life of the facility, in an amount sufficient tocompensate for maximum probable loss expectedfrom the facility operations, including low fre-quency, catastrophic risks, using either corporatefinancial test, corporate guarantee, and/or third-party instruments;

� Evidence of financial responsibility, whereby eachCCS facility is required to maintain evidence of fi-nancial assurance during the operational phaseequal to the expected value of closure, post-closure, foreseeable corrective action, and the netpresent value of long-term site monitoring;

� Oversight authority for the enforcement ofoperational/permitting disputes, whereby theboard is vested with the responsibility of institut-ing ‘go’ or ‘no-go’ decisions with respect to CCS

rence. Results for each year are summed over the relevant timeperiod and discounted to generate an expected estimate of fi-nancial consequences.

39 Lindene E. Patton and James L. Joyce, Hazardous WasteFinancial Assurance: A Comparison of Third-Party Risk Man-agement Mechanisms—Suggestions for Reform (114 DEN B-1,6/13/08).

40 For governance reasons, the number of members se-lected must be uneven.

41 ‘‘Go’’ or ‘‘No-Go’’ decisions may be warranted, even ifthe consequence of suspending or requiring closure of theproject is the temporary release of carbon dioxide back to theatmosphere—if continued sequestration endangers groundwa-ter or another natural resources. An independent, third-partyentity, such as the CCSSB, is best suited to avoid the politicaldrivers of such decisions; carefully assess available scientific,technical, and economic data; and weigh the adverse private/public consequences of continued CCS sequestration againstthe consequences of reversing gains in greenhouse gas emis-sions reductions.

42 Basic financial and business theory suggests that any fee-based structure essentially results in a pass through of the feeto consumers in the form of increased prices. To the degreesuch price pass throughs are warranted in the context of CCSdeployment, enabling legislation likely will be necessary to al-low for adjustments in rate allocations to account for the in-creased expense of delivering power. However, such passthroughs must be constructed carefully to avoid sending a zerodollar price signal to the operators about affected risks.

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projects, even if such decisions result after theCCS project is underway;

� Financing provisions requiring that the CCS facil-ity, at the time of site transfer, deposit into thetrust a one-time, lump sum payment equal to thenet present value of the expected cost of long-termsite monitoring commensurate with actual site-specific monitoring data collected during the op-erational phase;

� State access to funds up to a dollar threshold peroccurrence for monitoring, mitigation and/or im-mediate remediation costs incurred during re-sponse efforts involving a CCS site only where theCCS facility has been released from its closure/post closure obligations; and

� Provisions that overcome issues associated withthe Miscellaneous Receipts Act, whereby theBoard receives initial authorizing funds and isvested with the authority to collect funds and gen-erate revenues, as well as invest the balance offunds in a diversified investment portfolio, withthe expectation of becoming financially self-sustaining by a set date.

� A means by which the CCSSB is able to use a per-centage of collected funds to purchase bonds orinsurance for potential cost overruns associatedwith long-term site care and/or address fortuitousresidual risks remaining at the time of CCS sitetransfer to the extent such is possible and eco-nomically feasible at the time of the transfer.

Further, unless contributions to the trust map to theexpected value of expenses/damages likely to be in-curred over the long-term, there is little financial assur-ance that the balance of funds remaining at the time ofsite transfer will be appropriate to the long-term needfor funds. That is, there is no a priori reason to believethat the amount of funds remaining in the trust at thetime of site transfer will be equal to the actual amountof funds needed for long-term care. Given the lack ofreal monitoring data, the trust likely will be under- orover-funded for initial CCS projects, potentially result-ing in an inefficient use of economic resources. For thisreason, the trust balance should be re-evaluated whenactual site-specific monitoring data become available,but no less frequently than every three years.

The Importance of PoolingFinally, consideration should be given to the liability

and financial responsibility implications of industrypooling of sites based on geographic region, or sitecharacteristics. Consideration also should be given indetermining the degree to which financial contributionsto the trust release the CCS facility from legal liability.Specifically, questions remain with respect to whetherrelease/transfer of liability should be limited to (a) spe-cific categories of harm, damages, and/or expenses, or(b) when a maximum dollar threshold has beenachieved.

A Prospective Trust: Familiar and Tailored to CCSThese recommendations are not dissimilar to current

provisions governing the Oil Spill Liability Trust Fund(OSLTF) and the National Pollution Funds Center

(NPFC) mandated by the Oil Pollution Act of 1990,43 orthe Presidio Trust, established by Congress in 1996 asan independent management entity to preserve the Pre-sidio’s natural resources.44 Further, the aforementionedrecommendations could be extended and applied in adifferent country context, provided that local issues offit, interplay, and scalability are considered adequately.

2. Existing Risk Management Frameworks and LessonsLearned

Numerous liability and financial risk managementmodels have been instituted at the federal level to ad-dress a broad range of risks involving myriad privateand public goods and in service of a variety of privateand public actors—from cultural assets, art and arti-facts, biohazards, environmental hazards, qualifiedanti-terrorism technology, nuclear power, floods, pesti-cide use, avian flu, oil spills, and livestock protection toname a few.45 Existing federal models range from theobscure to the common. Most reflect a reaction to anunanticipated risk occurrence with material financialconsequences, such the Commercial Space Launch Actfollowing the Challenger disaster, or the Support Anti-terrorism by Fostering Effective Technologies Act of2002 following the events of Sept. 11, 2001.

Despite the narrowly focused objectives of many ofthese frameworks, a review of the strengths, weak-nesses, and lessons learned prove useful in evaluatingapproaches to address how best to manage the residuallong-term risk and attendant financial consequences ofCCS sites.

In general, these programs involve a blend of instru-ments designed to pool potential risk across private,public, or a mix of private/public actors. By design, anddepending on the situation, these programs release af-fected parties from financial responsibility for financialconsequences after a certain point in time, after a cer-tain financial threshold has been reached, or for catego-ries of harm or injury. In general, the programs involvea hybrid of public- and private-sector financing instru-ments.

Each statutory model is unique in the range of riskscovered, the range of entities receiving indemnity, thedegree of financial indemnity provided, and whether ornot the indemnity transfers with asset or site transfers.

Price-Anderson Nuclear Industries Indemnity ActEnacted in 1957 as an amendment to the Atomic En-

ergy Act of 1954, the Price-Anderson Nuclear IndustriesIndemnity Act (Price-Anderson) is one of the more fa-miliar federal indemnity models. Price-Anderson wasintended to encourage the development of nuclearpower, by partially indemnifying the nuclear industry inthe event of a catastrophic nuclear event. The act alsowas intended to protect the public in the event of anuclear incident by ensuring prompt and equitablecompensation for victims of a nuclear incident.

Essentially, Price-Anderson establishes a multi-tiered, risk-pooling program to indemnify the nuclear

43 Oil Pollution Act, Pub. L. No. 101-380, Aug. 18, 1990,codified at 33 U.S.C. 2701 et seq.

44 16 U.S.C. § 460bb appendix (enacted as Title I of H.R.4236, Pub. L. No. 104-333, 110 Stat. 4097, on Nov. 12, 1996)

45 Dollar estimates included in the following section are asrepresented by the source document, and have not been in-flated to current year dollars. Further, subsequent legislativeaction may have amended referenced values.

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industry against liability arising out of, or in connectionwith, licensed activities.46 The act provides no-fault in-surance to benefit the public in the event of a nuclearpower plant accident that the NRC deems to be an ‘‘ex-traordinary nuclear occurrence.’’ However, this struc-ture involved operator, third party, and governmentalcapital.

The act establishes three financing or coverage tiersfor licensed nuclear facilities with a rated capacity of100,000 electrical kilowatts or more:47

� (Tier 1) Individual Financing. Primary financial cov-erage equal to the maximum amount of liabilityinsurance available from private sources. Demon-strations can be in the form private insurance,self-insurance, or other proof of individual finan-cial responsibility.

� (Tier 2) Collective (Industry) Financing – the NuclearPools (and Mutuals). Private liability insuranceavailable under an industry retrospective ratingplan. This insurance is to be used when public li-ability claims exceed the level of primary financialprotection from private sources. Premiums andclaims are capped by statute.

� (Tier 3) Federal Financing. Licensees are indemni-fied from public liability arising from nuclear inci-dents after the individual and collective caps arereached.

Under this three-tiered coverage system, licensed fa-cilities are required to finance both individual liabilityinsurance and industry-pooled liability insurance. Inthe event of a nuclear occurrence, the act designatesthat the licensee first draw down its individual insur-ance to pay for private claims. If the value of the claimsexceeds the amount available from their individual in-surance, the licensee may access funds in the industry-pooled insurance to pay the balance of claims. In theevent that the private claims against a licensee exceedthe amounts available in both individual and pooled in-surance, the NRC is charged with assessing the causeand extent of residual (unpaid) damages—to determinewhether public liability exceeds the liability limits avail-able in the primary and secondary tiers. If so, then Con-gress is vested with the authority to ‘‘take whatever ac-tion’’ it determines necessary to compensate the publicfor all resulting public liability claims.48

Currently, under Section 2210(b)(1), the act caps thestandard deferred premium charged at a maximum dol-lar amount of $95.8 million, and not more than a setthreshold of $15 million in any given year.49 If claimsfor an incident exceed the available premiums fromboth the private and pooled insurance, the NRC has theauthority under Price-Anderson to indemnify the lic-ensee from remaining liability in connection with theoccurrence.

Currently, all 104 operating nuclear facilities in theUnited States must be licensed by the NRC.50 To obtainand retain licensing, the facility must submit proof ofcoverage for primary and secondary insurance. Price-Anderson also covers all Department of Energy (DOE)facilities, including their licensees and contractors.51 Inaddition, DOE is required to provide indemnification upto the statutory limit in any contracts that carry the riskof a nuclear incident.52

Intended to be temporary in nature, to foster develop-ment of nuclear power as a new and emerging technol-ogy, Price-Anderson has been repeatedly reauthorized.Most recently, as part of the Energy Policy Act of 2005,Congress extended Price-Anderson for an additional 20years (until 2025), and under Section 2210(d) increasedthe required coverage under the second-level insurancetier (from $63 million to $95.8 million).53

To date, Price-Anderson is largely untested. Allclaims made have been covered through the individualfinancing (Tier 1) level. Specifically, from the enact-ment of Price-Anderson in 1957 through December1997, approximately $131 million has been paid insettlement of private claims and litigation costs.54 Ap-proximately $70 million of the $131 million was paid forclaims resulting from the 1979 accident at Three MileIsland.55 In addition, DOE has paid approximately $98million in claims covered under Price-Anderson, arisingfrom qualified activities at their facilities.

Notably, Price-Anderson attempted to create an ex-press financial risk management system for the long-term stewardship of nuclear waste through a combina-tion of fee collection and a transfer of responsibility forsiting, transport, and long-term waste care to DOE.However, after decades of litigation, the United Statesremains without a meaningful storage mechanism forspent nuclear fuel.

The lesson to be learned from Price-Anderson is thatprivate/public tiered risk management systems canwork, but only when planned and properly financed inadvance. However, to the extent that a financial riskmanagement system transfers liability from the facilityoperator to other public or private actors in a mannerthat defers the specifics of long-term siting and costmanagement to some future, undefined date, imple-mentation of the framework is fraught with problemsand becomes largely ineffective and economically inef-ficient.

National Flood Insurance ActThe National Flood Insurance Act (NFIA) was en-

acted in 1968 as an insurance alternative to disaster as-sistance. The act serves two main purposes: (1) to com-pensate floodplain occupants for flood damage; and (2)to shift a measure of the financial burden from flood

46 The Atomic Energy Commission (AEC) originally man-aged the implementation of the Act. The Energy Reorganiza-tion Act of 1974 abolished the commission and created theNuclear Regulatory Commission (NRC); thereby transferringthe authority of the AEC to the NRC. Energy ReorganizationAct of 1974, Pub. L. No. 93-438, Sections 104, 201 and 202.

47 42 U.S.C. 2210(b)(1).48 42 U.S.C. 2201(e)(2).49 42 U.S.C. 2210(b)(1).

50 42 U.S.C. 2131. Number of licensed operating nuclear fa-cilities obtained from the NRC.

51 U.S. Department of Energy, ‘‘Report to Congress on thePrice-Anderson Act,’’ March 18, 1999. See also 42 U.S.C.2210(d).

52 Id.53 Energy Policy Act of 2005, 42 U.S.C. 15801 et seq., Title

VI, Subtitle A: Price Anderson Amendments Act of 2005, 42U.S.C. 2011 et seq.

54 U.S. Nuclear Regulatory Commission, ‘‘NRC’s 1998 Re-port to Congress on the Price-Anderson Act,’’ July 2, 1998.

55 Id.

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losses away from the federal government. The objectiveof NFIA is to:

s More effectively indemnify56 individuals for floodlosses through insurance,

s Reduce future flood damages through state andcommunity floodplain management regulations,and

s Reduce federal expenditures for disaster assis-tance and flood control.57

The Federal Emergency Management Agency(FEMA) administers the National Flood Insurance Pro-gram (NFIP), which was created to manage the imple-mentation of NFIA. Under NFIP, flood insurance is pro-vided to property owners in participating communitiesin exchange for state and community floodplain man-agement regulations that reduce potential future flooddamages.

Under NFIP, insurers establish a pool to provideflood insurance coverage to eligible property owners.The pool is designed so that insurers are able to assumea proportion of financial responsibility for payment ofclaims. In specific cases, the federal government subsi-dizes insurance premiums. The NFIP is designed to payfor flood insurance claims from funds paid through pre-miums rather than from tax revenues. Under NFIP, theinsurance sector receives an expense allowance. Pre-mium income in excess of the allowance is remitted tothe federal government.

Funding for NFIP is through the National Flood In-surance Fund, established by the U.S. Treasury in 1968,when the statute was enacted. Premiums collected aredeposited into the fund and losses, as well as adminis-trative costs, are paid from the fund. The program hasthe authority to borrow funds from the U.S. Treasury tocover fund shortfalls. However, borrowed funds mustbe repaid with interest. Liability for damages is cappedby the statute.58

Specifically, NFIA stipulates insurance companiesmust participate in a pool to provide flood insurancecoverage and enables payment of claims for losses un-der the NFIP.59 Further, under specific sections of theact, NFIP is limited in the amount of funds it can issuefor any given event. Finally, coverage based on charge-able premiums is capped for residential properties andsmall businesses.

The National Flood Insurance Reform Act of 1994 re-authorized NFIA and instituted several notablechanges, including increases to the amount of flood in-surance that can be purchased.60 Notably, the 1994amendment established the Flood Mitigation Assistancegrant program to assist states and communities in de-veloping mitigation plans and implement measures toreduce future flood damages to structures.

In 2004, the Flood Insurance Reform Act was promul-gated to reduce losses to properties for which repetitive

flood insurance claim payments have been made.61 Asa result of the substantial increase in claims followingHurricanes Katrina and Rita in 2005, temporary permis-sion to increase FEMA’s borrowing authority from $1.5billion to $20.8 billion was granted by Congress inMarch 2006.62

Since its inception, NFIP has made several paymentsfor flood damage claims, primarily resulting from hurri-canes and tropical storms. Through August 2005, NFIPhas paid approximately $14.6 billion in losses that oth-erwise would have been financed through disaster as-sistance or absorbed by individual homeowners.63 In re-sponse to claims made resulting from Hurricanes Kat-rina and Rita, NFIP has paid approximately $16.2billion, equating to more than 170,000 claims.64 FEMAestimates that when all claims are settled, total paidclaims will total more than $20 billion, which is nearly15 times greater than the $2 billion in premium pay-ments collected by the program during 2004—the yearprior to the hurricane event.65

Lessons learned from NFIP, as evidenced by the dis-parity between premiums collected and losses paid,suggest that the proffered system fails to effectivelycontrol for the manifestation of a ‘‘fat tail.’’ This unin-tended consequence generally arises because the sys-tem does not effectively control siting decisions withsufficient detail— particularly when such decisions in-volve the politically unpalatable displacement of privatecitizens located in known flood zones. Zoning decisionsand building permits are issued locally by institutionswho do not pay the costs for flood damages. In fact thesame problem is now manifesting in California with re-spect to fire fighting costs.66 In the context of CCS,some parties are proposing the use of eminent domainto acquire the necessary subsurface rights to sequestercarbon in technically safe and appropriate locations,which would pose similar challenges as those experi-enced with the administration of NFIP. Further, a ratio-nal, effective financial risk management framework forCCS will ensure that the parties who are charged withmaking siting decisions are the same parties respon-sible for managing and/or assuming eventual long-termliabilities. In so doing, the framework is best able toavoid the manifestation of a residual fat risk tail, be-cause the decisions required to avoid the ‘‘fat tail’’ andbetter assure a ‘‘skinny tail’’ are politically unpalatable.

56 Indemnity refers to the obligation to make good any lossor damage that another party has incurred, or may incur atsome point in the future. Indemnity also refers to the right thata party suffering a loss or damage is entitled to claim.

57 42 U.S.C. 4001(a) and (c).58 42 U.S.C. 4016 and 4017.59 National Flood Insurance Act of 1968, 42 U.S.C. 4051 (a).60 National Flood Insurance Reform Act of 1994, Pub. L.

No. 103-325, Section 573.

61 Bunning-Bereuter-Blumenauer Flood Insurance ReformAct of 2004, Pub. L. No. 108-264.

62 Government Accountability Office, ‘‘National Flood In-surance Program: New Processes Aided Hurricane KatrinaClaims Handling, But FEMA’s Oversight Should Be Im-proved,’’ GAO-07-169, December 2006.

63 Id.64 Government Accountability Office, ‘‘National Flood In-

surance Program: Greater Transparency and Oversight ofWind and Flood Damage Determinations are Needed,’’ GAO-08-28, December 2007.

65 Government Accountability Office, ‘‘National Flood In-surance Program: New Processes Aided Hurricane KatrinaClaims Handling, But FEMA’s Oversight Should Be Im-proved,’’ GAO-07-169, December 2006.

66 ‘‘Development is approved at the local level, and localgovernments then bear little fiscal consequence if the state isresponsible for the firefighting . . .Says Ms. Kehoe (D-SenatorCalif.): ’Local land use approval for . . .development. . .shouldbe tied to the future cost of firefighting. . .’ ‘‘California PondersWho Should Pay Firefighting Bill,’’ Wall Street Journal, July 9,2008, p. A3.

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Trans-Alaska Pipeline Authorization Act of 1973Enacted in 1973, the Trans-Alaska Pipeline Authori-

zation Act (TAPAA) was administered by the Depart-ment of Interior’s Bureau of Land Management.67 In1990, TAPAA was largely superseded by the Oil Pollu-tion Act of 1990. Nonetheless, aspects of TAPAA war-rant discussion in the context of designing a long-termfinancial risk management model for CCS.

By design, the intent of TAPAA was to facilitate de-livery of North Slope oil to domestic markets throughthe construction of the trans-Alaska oil pipeline. Undercertain circumstances, TAPAA provided indemnity tothe holder of the pipeline right-of-way for damages inconnection with, or resulting from, activities along thepipeline right-of-way.

The act also established the Trans-Alaska Pipeline Li-ability Fund (TAPLF), a nonprofit corporation adminis-tered by the holders of the right-of-way. Under TAPLFSection 204(c), the vessel owner/operator was heldstrictly liable for an initial dollar threshold of claimsand then remained liable for claims in excess of thisthreshold when the damages involved were caused byowner/operator negligence, up to a maximum dollarthreshold, as capped by Congress.68

The TAPLF was financed through a fee of 5 cents perbarrel of transported TAPS oil, paid by the owner of theoil. The permittee or right-of-way holder received thefee from the owner, and transferred it to a dedicated-TAPLF account. Fee collection was suspended when themaximum dollar threshold, on a per-owner basis, hadbeen accumulated. Collection resumed when the accu-mulation fell below a prescribed minimum threshold.The provisions of TAPLF applied only to vessels en-gaged in transportation between the terminal facilitiesof the pipeline and ports under the jurisdiction of theUnited States.69

Under the act, the holder of the right-of-way was heldstrictly liable to all damaged parties, unless it coulddemonstrate the damages were caused solely by: (1) Anact of war, or (2) negligence on the part of the UnitedStates, other government entity or the damaged party.70

Liability for allowable claims was determined in propor-tion to ownership interest in the right-of-way. Similar toPrice-Anderson, TAPAA provided for strict liability pay-ments up to a specified limit. Unlike Price-Anderson,however, TAPAA allowed the limit to be waived whennegligence was involved— injured parties could sue fordamages exceeding the limit established by the act, ifthey were able to prove negligence on the part of theoperator. Essentially, TAPAA did not limit the rights ofinjured parties to pursue damages from potentially li-able parties.71

On March 24, 1989, the Exxon Valdez ran aground onBligh Reef in Prince William Sound and spilled thou-sands of barrels of oil. In response to events surround-ing the Exxon Valdez spill, Congress amended TAPAAthrough the Oil Pollution Act of 1990 (OPA). Specifi-cally, Congress instituted a temporary amendment, 43U.S.C. Section 1653(c), establishing additional provi-sions related to the liability for discharges of oil loadedat terminal facilities and the payment of claims by TA-PLF.

Under the amendment, TAPLF was required to paydamage claims if the owner or operator refused to doso. The amendment authorized the fund to recover pre-judgment interest, costs, reasonable attorney’s fees,and at the discretion of the court, penalties for any ac-tion brought by the fund against an owner or operatorto recover costs incurred by the fund.72

Intended to be temporary in nature, OPA institutedprovisions stipulating that the amendments to TAPAAapplied only to claims arising from incidents occurringbefore the date of enactment of OPA. They were de-signed specifically to address the consequences of theExxon Valdez spill.

Lessons learned from the TAPLF suggest that maxi-mum probable loss estimates should be revisited withfrequency as new, technically important data becomeavailable. In so doing, society is able to avoid establish-ing artificial funding or liability caps that are below orabove the likely loss amounts, given the characteristicsand reality of the operations indemnified.

Oil Pollution Act of 1990In response to rising public concern following the

Exxon Valdez incident, the Oil Pollution Act (OPA) wassigned into law in August 1990. Essentially, OPA en-compassed and expanded the provisions of TAPAA.Specifically, OPA authorized use of the national OilSpill Liability Trust Fund (OSLTF) established in 1986.The fund is managed by the National Pollution FundsCenter (NPFC), an independent unit reporting directlyto the Coast Guard Chief of Staff.73

In 2005, the Energy Policy Act increased the borrow-ing limit of the fund to $2.7 billion.74 The balance of OS-LTF is mandated between $2 billion and $2.7 billion.75

There are three main sources of financing for the OS-TLF, including:76

s Barrel tax (5 cents per barrel), collected on petro-leum produced in or imported to the United States.The tax expired in 1994, but was reauthorized by

67 Government Accountability Office, ‘‘Trans-Alaska Pipe-line: Regulators Have Not Ensured That Government Require-ments Are Being Met,’’ Report to the Chairman, Subcommitteeon Water, Power, and Offshore Energy Resources, Committeeon Interior and Insular Affairs, House of Representatives, July1991.

68 An Act to Amend Section 28 of the Mineral Leasing Actof 1920, and to Authorize a Trans-Alaska Oil Pipeline, and forother purposes, Pub. L. No. 93-153, Nov. 16, 1973, Section204(c).

69 Id.70 43 U.S.C. 1653(a)(1).71 Dan R. Anderson, Limits on Liability: The Price-

Anderson Act versus Other Laws The Journal of Risk and In-surance, Vol. 45, No. 4 (1978).

72 Oil Pollution Act, Pub. L. No. 101-380, Aug. 18, 1990, Sec-tion 8102. On June 25, 2008, the U.S. Supreme Court over-turned the punitive damages award of $2.5 billion againstExxon for the 1989 oil spill in Alaska’s Prince William Sound.The U.S. Supreme court ruled that, ‘‘as a matter of maritimecommon law,’’ the punitive damages award was excessive, andshould be limited to an amount equal to compensatory dam-ages, or $507.5 million in this case. Exxon Shipping Co. v.Baker, 128 S. Ct. 2605, 66 ERC 1545 (2008). See also (123 DENA-1, 6/26/08).

73 Department of Homeland Security, United States CoastGuard, Report on Implementation of the Oil Pollution Act of1990, (2005).

74 Energy Policy Act of 2005, Pub. L. No. 109-58, Aug. 8,2005, Section 1361

75 Id.76 Department of Homeland Security, United States Coast

Guard, Report on Implementation of the Oil Pollution Act of1990 (2005).

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Section 1361 of the Energy Policy Act of 2005. Col-lection of fees is suspended when a pre-set maxi-mum dollar threshold in the fund has been accu-mulated. Collection resumes when the accumula-tion falls below a set minimum threshold.77

s Transfers from other existing pollution funds, in-cluding $335 million transferred from TAPLF col-lected between 1995 and 2000. No additional fundsremain in TAPLF to be transferred to OSLTF.

s Interest on OSLTF principal from the U.S. Trea-sury investments.

s Cost recoveries from responsible parties.In addition, OPA established the following provi-

sions:s Liability Provisions. The owner or operator of a ves-

sel or a facility from which oil has been dischargedis liable for damages and removal costs.78

s Damage Thresholds. Under the Section 2704(a) ofthe act, tank vessels larger than 3,000 gross tonsare capped at $1,200 per gross ton or $10 million,whichever is greater. Responsible parties at on-shore facilities and deepwater ports are liable forup to a pre-set dollar value per spill. The federalgovernment has the authority to adjust, by regula-tion, the liability limit established for onshore fa-cilities. Holders of leases or permits for offshorefacilities also are liable for up to a pre-set value perspill, plus removal costs.79

s Evidence of Financial Responsibility. Offshore facili-ties are required to maintain evidence of financialresponsibility of up to an absolute dollar value.80

Vessels and deepwater ports must provide evi-dence of financial responsibility up to the maxi-mum applicable liability amount.81 Claims for re-moval costs and damages may be asserted directlyagainst the guarantor providing evidence of finan-cial responsibility.

Finally, OPA provided states with the authority to en-force, on the navigable waters of the state, require-ments for evidence of financial responsibility. In addi-tion, states are provided access to federal funds (up to$250,000 per incident) for immediate removal, mitiga-tion, or prevention of a discharge. The states also canbe reimbursed by the OSLTF for removal and monitor-ing costs incurred during oil spill response and cleanupefforts.82

Lessons learned from the OPA and OSLTF structureinclude, but are not limited to, the importance of thecontinuation of any funding for any and all applicablefinancial risk management mechanisms. This is particu-larly important if the structure is designed to compen-sate for liabilities and losses caused during the opera-tional life of any covered facility or for any activity thatmust continue throughout the entire lifecycle of the fa-cility or operation. Artificial sunset provisions that arenot connected to an evaluation of risk can leave finan-cial risk management tools unfunded or underfunded,and thus eliminate the assurance that funds will be

available in the timing and amounts necessary to meettheir intended purpose.

C. ConclusionA long-lived, private/public financial risk manage-

ment framework that relies solely on risk-transfer in-struments, such as insurance, may be appropriate tomanage certain catastrophic risks and financial conse-quences, particularly with respect to relatively low-probability, high-damage scenarios.

The limitations of this model lie in the fact that, bydesign, existing federal models—Price-Anderson andNFIA—are intended only to compensate for damages.These models do not easily address the companionneed to finance long-term care activities after the owneror operator has been released from its post-closure re-sponsibilities. In other words, these types of liabilityframeworks generally are designed to compensate fordamages after the fact, not for the carrying costs ofmonitoring, measuring, or verification, or for costs ofminimum activities over time to ensure site security be-fore the fact. In addition, if not crafted carefully andpriced accurately, a federally-backed indemnity pro-gram, such as the Price-Anderson and NFIP models, in-appropriately may shift the burden of future liabilitiesto the insurance sector or other third-party institution inthe near-term, and the general public in the long-term.

Further, arbitrary limits on liability that do not mapto the evolution of the long-term risk profile of CCSsites—from early movers to commercial-scaledeployment—may result in inadequate coverage, result-ing in substantial financial exposure for the institutionsbackstopping claims made against the program.83 Thisis particularly so if commercial-scale deployment re-sults in the adverse selection of sites with increasinglyrisky profiles due to moral hazard.

As such, a revolving fund may be most appropriate toaddress certain ‘‘skinny tail’’ liabilities. The advantageof compensation funds, or a national trust, rests withthe assurance that funds are dedicated for an intendedpurpose. Similar to TAPLF and OSTLF, contributions tothe fund can span numerous funding sources, andthereby appropriately share the burden across private-and public-sector stakeholders. In addition, the financ-ing of the fund can be designed such that collection offees is suspended when a prescribed maximum dollarthreshold in the fund has been accumulated, and collec-tion of fees can resume when the accumulation falls be-low a minimum set threshold.

However, there are several notable considerationswhen considering the design of an effective trust frame-work. First, which entity (state or federal, public or pri-vate) will assume responsibility for managing and dis-bursing moneys invested in the fund? Second, to whatdegree will financial contributions to the fund releasethe owner or operator of a CCS from legal liability? Willrelease or transfer of liability be limited to specific cat-egories of harm, damages and/or expenses, or at thetime a maximum dollar threshold has been achieved?Third, who will determine the value of the fund, andhow will it be determined?

77 Energy Policy Act of 2005, Pub. L. No. 109-58, Aug. 8,2005, Section 1361.

78 33 U.S.C. 2702(a).79 Id.80 33 U.S.C. 2716(c)(1)(C).81 33 U.S.C. 2716(a) and 2716(c)(2).82 33 U.S.C. 2712(d)(1).

83 Elizabeth J. Wilson, Mark A. De Figueiredo, Chiara Tra-bucchi, Kate Larson, Liability and Financial ResponsibilityFrameworks for Carbon Capture and Sequestration, WorldResource Institute: WRI Issue Brief Carbon Capture and Se-questration, No. 3 (2007).

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Federal agencies currently do not have the authorityto collect, manage, and disburse dedicated funds. Leg-islation establishing a dedicated trust fund for CCS ac-tivities will be necessary.

State jurisdiction for CCS sites that span containmentzones crossing state boundaries will pose unique prob-lems with respect to the transfer of a CCS site at thestate level, as well as the right and ability of multiplestates to access the fund. For this reason, a nationaltrust that is managed by an independent third-party—the CCSSB is recommended. In addition, considerationshould be given to whether the trust should establishsublimits by site (based on contributions, perhaps)and/or by state, and if so, what will be the basis for es-tablishing such sublimits?

Unless priced accurately, the amount of money re-maining in a compensation fund, or national trust, afterthe CCS operator has been released from its post-closure responsibilities, may not be equal to the actualamount of funds needed to cover expenses and poten-tial damages resulting post-injection. There is no apriori reason to believe that residual fund balancesfrom financial responsibility instruments used duringthe operational phases of the CCS project lifecycle willappropriately match the need for funds over the long-term. In fact, to combine the financial assurance instru-ments between the phases would reintroduce issues offit, interplay, and scalability.

To ensure adequate resources at the time of sitetransfer, the compensation fund or national trustshould be re-evaluated, and ‘trued up’ based on aclearly defined long-term risk profile, developed fromactual site-specific monitoring data—one that articu-lates the degree and probability of long-term risk at thesite.

Finally, if contributions to the trust on a per-owner orper-operator basis do not map to the actual risk profileand the expected value of damages/expenses likely tobe incurred over the long-term at each CCS site, thereis little assurance that the balance of funds remaining atthe time of transfer will be appropriate to the long-termneed for funds. Further, there is little assurance thathigh quality, low risk operations will be favored overhigh risk, low quality operations, unless the mechanismsends price signals which accurately reflect risk. Inother words, the fund likely will be either under- orover-funded, potentially resulting in an inefficient useof economic resources. Moreover, and perhaps mostimportantly, is the issue of moral hazard: Does this typeof structure inherently provide site developers with afree pass?

By definition, fee-based trusts and compensationfunds lend themselves to situations where the site de-veloper believes it has paid first dollar for relief. Assuch, there is little or no incentive to make economi-cally efficient, environmentally sound operating deci-

sions. The soundness of the CCS operator’s decisionsduring the initial siting and operational phases will as-suredly influence the probability of long-term risksmanifesting, and the attendant materiality of financialconsequences. If not held completely financially and le-gally responsible for future, long-term damages, willthe CCS operator be less careful in their siting and op-erating decisions? Only time will truly tell.

A financial risk management system, as described inthis article, can be designed to mitigate the potential forthe fat residual risk tail through the retention of finan-cial responsibility with the operator in ways that createan appropriate fit, given the economic system and asso-ciated institutions—i.e., corporate, private-public—inwhich the technology must be deployed. Via the cre-ation of the CCSSB and attendant operational financialrequirements, the financial risk management frame-work for CCS should cover properly the risk manage-ment needs of the operation, closure, and post-closurephases of the facility lifecycle through the adoption ofestablished financial assurance requirements. It alsomust provide for long term care—after demonstrationof performance-based endpoints—through a properlycreated, funded and dedicated revolving fund adminis-tered by the CCSSB.

The goal should be to create a framework today thatcan address society’s stated preference for short andmid-term needs to reduce carbon dioxide emissionsfrom coal-fired power plants, without the unintendedconsequence of numerous stranded assets that contrib-ute to the inefficient use of invested capital and unnec-essary strains on regional economies. Further, the sheeramount of coal reserves present in the United Statessuggests that the continued use of coal may be criticalto energy security. However, an equally important ob-jective is incentivizing the lowest risk deployment ofCCS technology as economically as possible, whileleaving room for technological and risk reduction im-provements and simultaneously protecting against thereasonable worst case scenario—climactic change andcontinued ecological degradation.

About the Authors: This article was written by ChiaraTrabucchi and Lindene E. Patton. Trabucchi is a Prin-cipal with Industrial Economics. Patton is the ChiefClimate Product Officer for Zurich Financial Services.The views presented here are the personal views ofthe authors and do not necessarily reflect the views ofany other person or entity. The authors would like tothank Scott Anderson, Brendan Beck, Anhar Karimjee,Tom Kerr, Doug Koplow, Christine Lee, AndrewPaterson, George Peridas, Frank Tierney, and SarahWade for their insights and willingness to brainstormabout the options available to address the challengingpolicy and technical issues associated with the long-term care of CCS sites.

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